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Reverse mortgages can be an attractive option for seniors who want to supplement their retirement income, pay off debts, or make home improvements. However, they should be carefully considered as they can have significant financial and legal implications.
Here’s how reverse mortgages work, the pros and cons, and what to consider before deciding if it’s right for you.
What is a reverse mortgage?
A reverse mortgage offers a unique financial option for homeowners aged 62 and older, enabling them to utilize the equity in their home without the obligation to make monthly mortgage payments.
Through this arrangement, homeowners have the flexibility to receive funds in several ways: a single lump sum, as ongoing monthly payments, or through a line of credit that can be accessed as needed. The defining characteristic of a reverse mortgage is its payment structure; rather than the homeowner paying the lender, the lender pays the homeowner based on the equity built up in the home.
This type of loan is specifically designed for seniors looking for additional income streams during retirement, leveraging the equity they have accumulated in their property over the years. The loan balance, including interest and fees, is deferred until the home is sold, the homeowner permanently relocates, or in the event of the homeowner’s death, at which point the estate is responsible for repayment.
Understanding How a Reverse Mortgage Works
Reverse mortgages enable senior homeowners to access their home’s equity in a flexible and strategic manner. This financial tool is especially beneficial for those who wish to remain in their home while supplementing their retirement income, covering healthcare expenses, or funding home improvements, all without the requirement to make monthly loan repayments. The process is straightforward and designed to provide seniors with financial relief by tapping into the value of their most significant asset—their home.
Step 1: Assess Your Eligibility
To kick things off, confirm your eligibility for a reverse mortgage. Requirements include being at least 62 years old, owning your home (or at least having a significant amount of equity in it), and using the home as your primary residence. You’ll also need to demonstrate that you can handle ongoing costs like property taxes, homeowners’ insurance, and regular maintenance.
Step 2: Calculate Your Home Equity
Your home’s equity is central to determining your reverse mortgage potential. Simply, it’s the difference between your home’s market value and any outstanding mortgage balance. The greater your equity, the more you might receive from a reverse mortgage.
Step 3: Select the Right Reverse Mortgage Product
Explore the different types of reverse mortgages available, including the federally insured Home Equity Conversion Mortgage (HECM), proprietary reverse mortgages for higher-value homes, and single-purpose reverse mortgages from certain state and local governments. Each type caters to specific needs and financial scenarios.
Step 4: Get a Professional Home Appraisal
An essential step in the process is obtaining a professional appraisal of your home. This assessment determines your home’s market value based on factors such as location, condition, and the sale prices of similar homes nearby.
Step 5: Undergo Counseling
A crucial step is to undergo counseling from a HUD-approved agency. This ensures you fully understand the reverse mortgage process, its financial implications, and how it fits into your overall estate planning.
Step 6: Decide How You’ll Receive the Funds
Reverse mortgages offer several options for receiving your funds: as a lump sum, in monthly payments, as a line of credit, or a mix of these methods. Your choice should align with your financial objectives and needs.
Step 7: Know When and How Repayment Works
No monthly payments are required with a reverse mortgage. The loan is repaid when the last borrower dies, sells the home, or the home is no longer used as the primary residence. Typically, the home is sold, and the proceeds are used to pay off the loan balance, including interest and fees.
Real-Life Example: Maximizing Loan Amount Through Equity
Imagine homeowners John and Mary, who own a home worth $300,000 clear of any mortgage. They qualify for a reverse mortgage that grants them access to $150,000. Opting for monthly payments, they supplement their retirement income, demonstrating how equity determines borrowing capacity and the flexibility in receiving funds.
Choosing the Right Type of Reverse Mortgage
When considering a reverse mortgage, it’s crucial to understand the different types available to you. Each type comes with its own set of features, benefits, and limitations.
Here, we’ll delve into the three primary types of reverse mortgages: the Home Equity Conversion Mortgage (HECM), proprietary reverse mortgages, and single-purpose reverse mortgages. By comparing these options, you can make a more informed decision that aligns with your financial situation and retirement goals.
Home Equity Conversion Mortgage (HECM)
Pros:
- Federally insured, offering a layer of security.
- Flexible payout options, including lump sum, line of credit, or fixed monthly payments.
- Can be used for any purpose, without restrictions.
Cons:
- Higher upfront costs, including mortgage insurance premiums.
- Requires counseling from a HUD-approved agency, which may be seen as an extra step.
- The loan amount is capped, which may limit access to equity for homeowners with higher-valued properties.
Proprietary Reverse Mortgages
Pros:
- Designed for higher-valued homes, potentially offering access to more significant loan amounts.
- May have lower upfront costs than HECMs.
- Not subject to the same insurance and borrowing limits as HECMs, offering more flexibility.
Cons:
- Not federally insured, which might pose additional risks.
- May come with higher interest rates and fees.
- Less regulatory oversight, requiring thorough due diligence by the borrower.
Single-Purpose Reverse Mortgages
Pros:
- Typically the lowest cost option available.
- Offered by state and local government agencies and some non-profits, intended for a specific purpose like home repairs or property taxes.
- Interest rates may be lower than other reverse mortgages.
Cons:
- Limited availability, as not all states and municipalities offer them.
- The loan must be used for a specific, lender-approved purpose.
- Not suitable for those looking for flexibility in how they use their funds.
Making the Right Choice
Choosing the right type of reverse mortgage depends on several factors, including your financial needs, the value of your home, and how you plan to use the funds. HECMs offer flexibility and security, but come with higher costs.
Proprietary reverse mortgages can provide access to larger sums for those with high-value homes but lack the insurance and sometimes the stability of HECMs. Single-purpose reverse mortgages are cost-effective for specific needs but offer limited flexibility.
Before deciding, it’s recommended to consult with a financial advisor or a HUD-approved counselor. They can provide personalized advice based on your financial situation and help you navigate the complexities of each option, ensuring you choose the reverse mortgage that best fits your retirement planning needs.
Eligibility Criteria for Reverse Mortgages
The FHA insures certain reverse mortgages, as long as borrowers meet certain requirements:
- Be at least 62 years of age.
- Live in the home as a primary residence (or your spouse, listed on the mortgage, must live in the home.)
- Be capable of paying property taxes and homeowners insurance, as well as other maintenance costs and fees while you live in the home.
- Meet FHA property requirements for the home.
- Are you willing to attend a counseling session about home equity conversion mortgages (HECMs).
- There are no delinquent federal debts on your account.
You’re more likely to get the money you need if you own your home outright, or if your loan balance is small so that you have a great deal of equity.
Reverse Mortgage Borrowing Limits
When you apply for a reverse mortgage loan, your lender will consider a few factors that will influence the amount of money you receive, including:
- Your age
- Value of your home
- Equity available in your home
- Interest rate
- FHA mortgage limit for home equity conversion mortgages
- Whether your fees are rolled into the loan
- How you choose to receive your money
The older you are, and the more equity you have in your home, the more you’re likely to be approved for. Keep in mind, too, that fees associated with reverse mortgages are often much higher than fees for other types of home equity loans. That’s going to eat into how much you actually receive — even if you have a lot of equity in your home.
One of the perks of FHA-insured reverse mortgages is the fact that you don’t have to pay back more than the home is worth. So, if the value drops, and you owe more than it’s worth, you (or your heirs) might have to sign a deed in lieu of foreclosure turning it over to the bank. This is one reason many reverse mortgage lenders won’t actually lend you the entire amount of your equity.
You can use the money for whatever you want, whether it’s paying off debt, covering living expenses, or going on a vacation.
Accessing Your Reverse Mortgage Funds
If you get a fixed-rate reverse mortgage, you’ll receive a lump-sum payment. You can then take that money and do whatever you want with it. However, when it runs out, it’s gone. Some retirees use a lump sum to fund a retirement investment portfolio or purchase an immediate annuity. Others use the money to pay off debts or cover other expenses.
With an adjustable-rate HECM, you have different options available. You can choose to receive set monthly payments for a specific period of time or get payments for as long as you or an eligible spouse live in a house.
If you choose an open-ended payment schedule, you’ll likely get a smaller amount each month. However, you can be reasonably sure that you’ll continue to receive money until you pass on or move into a long-term care facility. With a fixed-term payment schedule, you could see higher cash flow every month. However, you run the risk of outliving the payments and trying to figure out what to do next.
Finally, you can also choose to use your reverse mortgage as a line of credit. You can withdraw funds as needed, up to the credit limit. This is a little more flexible and can be useful if you have other sources of income, and just want the HECM in case you need to fill a gap on occasion.
Pros and Cons of a Reverse Mortgage
If you’re considering a reverse mortgage, it’s a good idea to start with an FHA-approved lender so you receive protection. You can use an online locator to find a counselor who can help you with the process, or you can call 800-569-4287.
Carefully consider the pros and cons, too.
Pros
There are some ways to benefit from a home equity conversion mortgage that you wouldn’t see with a more “traditional” home equity loan.
- No monthly payments as a borrower
- Improve monthly cash flow
- Pay off debt (including an existing mortgage on the home)
- Non-borrowing spouse can remain in the home
- Loan is paid off by selling the house when you pass on or move out
Cons
While a home equity conversion mortgage might seem like a no-brainer, there are some downsides to consider before you proceed.
- High closing costs and other fees
- You might not be able to pass the home on to your heirs
- Costs associated with property taxes, mortgage insurance, and maintenance must still be paid
- You’re draining a major asset—and you might still outlive your money
How to Spot and Avoid Reverse Mortgage Scams
Scams related to reverse mortgages are a serious concern, as they often target vulnerable seniors who may be seeking financial relief or have cognitive impairments. These scams can come in the form of dishonest vendors or contractors who promise home improvements in exchange for a reverse mortgage. However, they then either fail to deliver quality work or outright steal the homeowner’s money.
Similarly, family members, caregivers, and financial advisors may use a power of attorney to obtain a reverse mortgage on a senior’s home and then steal the proceeds. They may also try to convince seniors to buy financial products that they can only afford through a reverse mortgage, which may not always be in the senior’s best interest.
It’s important to be cautious and do thorough research to protect yourself from these types of scams.
Is a reverse mortgage right for you?
With a reverse mortgage, you can use your home as an asset if you know you’ll stay in it for a long time and need a little extra income for retirement. Borrowers who don’t intend to pass the home to heirs may benefit financially from the home during retirement. That is, as long as you can keep up with the costs of maintaining the home and pay property taxes.
In contrast, getting a reverse mortgage loan might not make sense if you can’t afford home maintenance or if you wish to leave your home to your heirs. When you’re no longer living in the home, your heirs will need to sell the home to pay off the loan. If not, they’ll have to pay the loan themselves to keep the house. If there’s enough money in the estate to pay it off, it will reduce how much ready cash they receive when you pass on.
Carefully consider your situation and your priorities before you decide to get a reverse mortgage. Then, make the decision most likely to benefit you in retirement and increase the chance that you’ll outlive your money.
Source: crediful.com
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Key takeaways
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A home equity loan allows you to borrow a lump sum against your home’s equity, usually at a fixed interest rate that’s lower than other forms of consumer debt.
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The amount you can borrow with a home equity loan is based on the current market value of your home, the size of your mortgage and personal financials like your credit score and income.
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Home equity loans are best used for five-figure renovation or repair projects — which can garner you a tax deduction on their interest — or to consolidate other debts.
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Home equity loans drawbacks include putting your home at risk of foreclosure and their lengthy application process.
Key takeaways
- A home equity loan allows you to borrow a lump sum against your home’s equity, usually at a fixed interest rate that’s lower than other forms of consumer debt.
- The amount you can borrow with a home equity loan is based on the current market value of your home, the size of your mortgage and personal financials like your credit score and income.
- Home equity loans are best used for five-figure renovation or repair projects — which can garner you a tax deduction on their interest — or to consolidate other debts.
- Home equity loans drawbacks include putting your home at risk of foreclosure and their lengthy application process.
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What is a home equity loan?
A home equity loan is a type of second mortgage secured by the equity in your home. It offers a set amount at a fixed interest rate, so it’s best for borrowers who know exactly how much money they need. You’ll receive the funds in a lump sum, then make regular monthly repayments amortized over the term of the loan, typically as long as 30 years.
Because your home is the collateral for the loan, the amount you’ll be able to borrow is related to its current market value. The interest rate you receive on a home equity loan (as with other loans) will vary depending on your lender, credit score, income and other factors.
Home equity loans in 2024
While the housing sales have cooled in some areas in recent months due to higher mortgage rates, housing prices have continued to post gains – good news for the net worth of American homeowners. According to the Board of Governors of the Federal Reserve System, U.S. households possess a collective $32.6 trillion in home equity as of the third quarter of 2023.
That’s a record high, and it means that the vast majority of homeowners are sitting on a huge pile of equity that they can leverage to access cash, including through a home equity loan. In fact, according to TransUnion’s latest “Home Equity Trends Report,”, the median amount of tappable equity per homeowner is $254,000, and some householders are in an even better position: 5.8 million of them have more than $1 million of available equity.
2023 saw a reversal in the demand for tapping all that equity. As rates jumped, the number of borrowers interested in home equity loans – along with HELOCs, their line-of-credit cousins – dropped in the back half of last year. TransUnion’s data shows that HELOC originations in the third quarter of 2023 fell by 28 percent versus the year before. Home equity loans were only down by 3 percent, though – perhaps a reflection of a homeowner’s confidence in the predictability of a fixed-rate home equity loan versus the volatility of variable-rate HELOC (more on that below).
10.16%
The average $30,000 HELOC rate as of the beginning of January 2024 — up from 7.62% in January 2023.
Source:
Bankrate national survey of lenders
As for 2024: The potential for Federal Reserve interest rate cuts could be good news for home equity loans. While the forecast doesn’t call for massive savings — for HE loans, anyway — any reduction in borrowing costs saves prospective borrowers some cash, and encourages them to turn to this financing tool.
What are average home equity loan interest rates?
As of late January 2024, home equity loan rates for the benchmark $30,000 loan are averaging just under 9 percent, within a tight range of 8.5 to 10 percent. While high compared to their average of six percent in 2022, that’s significantly lower than other forms of consumer debt. Credit card rates are lingering above the 20-percent mark, and personal loans can stretch into the 25–35 percent range for borrowers with less-than-perfect credit scores.
How does a home equity loan work?
When you take out a home equity loan, the lender approves you for a loan amount based on the percentage of equity you have in your home and other factors. You’ll receive the loan proceeds in a lump sum, then repay what you borrowed in fixed monthly installments that include principal and interest over a set period. Although terms vary, home equity loans can be repaid over a period as long as 30 years.
Since the loan is secured by your home, the property is at risk for foreclosure if you can’t repay what you borrowed. If that happens, it can cause serious damage to your credit score, making it harder for you to qualify for future loans.
You can use the funds from a home equity loan for any purpose, but there’s a possible tax benefit if you use the money to improve your home. You can deduct the interest (up to the limit) if the home equity loan is used to “buy, build or substantially improve” the property. To do this, you’ll need to itemize your deductions.
Home equity loan requirements
Lenders have different requirements for home equity loans, but generally, the standards include:
- Credit score: Mid-600s or higher
- Home equity: At least 20 percent
- Employment and income: At least two years of employment history and pay stubs from the past 30 days
- Debt-to-income (DTI) ratio: No more than 43 percent
- Loan-to-value (LTV) ratio: No more than 80 percent
What should you use a home equity loan for?
Some of the best reasons to use a home equity loan include:
- Upgrading your home: Whether you’re looking to remodel your kitchen, add an in-law suite or install solar shingles on your roof, a home equity loan can be a smart way to pay for the enhancements. You’ll be improving your home, which means you get to enjoy living there more; and when you’re ready to sell, the upgrade can potentially make it more attractive (and more valuable) to buyers. Plus, you can qualify for some tax benefits — a deduction on the interest — when you use a loan to invest in the property in this way.
- Consolidating high-interest debt: If you’ve been struggling to pay off debts with high costs like credit cards, a home equity loan can make a big difference in the amount of interest you’re paying. However, if you’re considering this route, there are two important caveats. First, you need to have a real commitment to not build those credit card balances up again. Second, the amount of debt needs to be fairly significant. Credit card balance transfers can be a better option if you’re aiming to pay off less than $10,000.
- Covering large medical bills: Health care can be incredibly expensive, and medical problems often arise unexpectedly. If you or a family member needs a procedure, treatment or long-term care that isn’t fully covered by insurance, a home equity loan could be a good way to handle the costs.
When you should avoid getting a home equity loan
If you’re thinking about using a home equity loan and any of these describe you, think again:
- Covering discretionary spending: You don’t have to go on that pricey vacation for spring break (find something fun to do for a staycation). You also don’t have to host a wedding (go to the courthouse). While both of those kinds of big expenses can be fun, they are not reasons to hock your home. Save for longer, or find a more affordable way to make them happen.
- Paying for college: You may find lenders who advocate paying college tuition via home equity, but this is a risky move. There is no guarantee that your child is going to graduate, but there is certainly a guarantee that you need to have a home. Look at taking out federal student loans in your child’s name instead: Their interest rates are lower, and they come with benefits like income-based repayment options.
- Paying for a relatively small project: If you only need a small amount of cash – think less than $20,000 – you may be better off looking for other options such as a credit card with a long zero-percent APR period or simply taking longer to set aside some savings.
How much can I borrow with a home equity loan?
To figure out how much you might be able to borrow with a home equity loan, you first need to understand how much home equity you actually have. Your equity is the essentially difference between how much your home is worth and how much you owe on your first mortgage. For example, if your home’s current fair market value is $500,000 and you owe $250,000, you have a 50 percent equity stake.
Most lenders will let you borrow up to 80 percent of your equity stake (some let you go as high as 85 or even 90 percent). However, there’s another factor to consider: How much all your loans amount to or your combined loan-to-value ratio (CLTV). Most home equity lenders will cap your total amount of home-secured debt – including your first mortgage – at 80 percent of the home’s market value. So, in that case, you would likely be able to borrow up to $150,000, taking your total mortgage debt to $400,000 (80 percent of $500,000). Bankrate’s home equity calculator can help you estimate your exact borrowing power.
Home equity loan pros and cons
Pros of home equity loans
- Attractive interest rates: Home equity lenders typically charge lower interest rates compared to the rates on personal loans and credit cards. This is because home equity loans are a type of secured debt, meaning they’re backed by some sort of collateral (in this case, your house) — which makes them less risky for the lender, compared to unsecured debt, which isn’t backed by anything.
- Fixed monthly payments: Home equity loans offer the stability of a fixed interest rate and a fixed monthly payment. This might make it easier for you to budget for and pay each month. This also eliminates the possibility of getting hit with a higher payment with a variable-rate product, like a credit card or home equity line of credit (HELOC).
- Tax advantages: You could be eligible for a tax deduction if you use the loan proceeds to substantially improve or repair the home. Check with an accountant or tax professional to learn more about this deduction and to determine if it’s available to you.
Cons of home equity loans
- Home on the line: Your home is the collateral for a home equity loan, so if you can’t repay it, your lender could foreclose.
- No flexibility: If you’re not sure how much money you need to borrow (you’re planning a big remodeling project, say), a home equity loan might not be the best choice. Because home equity loans only offer a fixed lump sum, you run the risk of borrowing too little. On the flip side, you might borrow too much, which you’ll still need to repay with interest (though you might be able to settle the debt early, if that’s the case).
- Lengthy, costly application: Applying for a home equity loan is akin to applying for a mortgage; though somewhat simpler, it often means lots of paperwork, a long process and closing costs.
What’s the difference between a home equity loan and a HELOC?
A HELOC – short for home equity line of credit – is also secured by the equity in your home and has similar requirements to a home equity loan, it operates a bit differently. With a HELOC, you can borrow money on an as-needed basis, up to a set limit, typically over a 10-year draw period. During that time, you’ll make interest-only payments on what you borrow. This means that your payments may be smaller than a home equity loan, which includes both interest and principal. When the draw period on the HELOC ends, you’ll repay what you borrowed and any interest, usually over a repayment term of up to 20 years. Unlike home equity loans, HELOCs have variable interest rates, which means your monthly payments can change.
Other home equity loan alternatives
A home equity loan and a HELOC aren’t your only options for borrowing against your equity. Some other alternatives include:
- Shared equity agreements: Investment companies like Unlock and Hometap offer shared equity agreements, which let homeowners access cash now in exchange for a portion of the home’s value in the future. These arrangements vary, but they all have one upside: You don’t have to make monthly payments, because the money is technically not a loan, but an investment — funds in exchange for a share in your home. However, they all have the same downside: You’re going to make a big payment eventually, and it will likely wind up coming out of the proceeds when you sell the home.
- Cash-out refinance: Another option to convert a portion of your home equity into ready money is through a cash-out refi. Unlike a home equity loan, a cash-out refi replaces your current mortgage with a new one for a higher amount, with you taking the difference between the outstanding balance and the new balance in cash. You’ll need to think carefully about a cash-out refi based on the rate attached to your current mortgage. If you managed to lock in a super-low rate during the pandemic, a cash-out refinance is almost certain to lock you into a significantly higher rate.
- Personal loans: Personal loans can be a cost-effective route if your credit score is in 760-and-above territory. These are unsecured loans – meaning you won’t have to put your house on the line. However, borrowing limits tend to be lower, and the repayment period will be shorter than most home equity loans’.
Home equity loans FAQ
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Taking on any form of debt, including a home equity loan, has an impact on your credit score. After you close on a home equity loan, your score might decrease temporarily. Over time, as you continue to make timely payments on the loan, you might see your score improve, as well.
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It varies by lender, but most home equity loans come with repayment periods between five years and 30 years. A longer loan term means you’ll get more affordable monthly payments. That said, you’ll also pay far more in interest. If you can afford the higher monthly payments, selecting a shorter term maximizes overall cost. The ideal is to find a compromise between the two: the maximum manageable payments and the shortest loan term.
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Fees for home equity loans vary by lender, which makes it very important to compare offers. Some home equity lenders require you to pay an origination fee and other closing costs, typically between 2 percent and 5 percent of the loan balance. You might also pay a home appraisal fee. Once the loan proceeds are disbursed to you, late fees could apply if you remit payment after the monthly due date or grace period (if applicable).
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There are no restrictions on how you purpose your home equity loan. The most common uses include debt consolidation for high-interest credit card balances or other loans; home repairs or upgrades; higher education expenses and medical debts. Some choose to use the funds to start a business, purchase an investment property or cover another major purchase.
Source: bankrate.com
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MoMo Productions/ Getty Images; Illustration by Austin Courregé/Bankrate
Portions of this article were drafted using an in-house natural language generation platform. The article was reviewed, fact-checked and edited by our editorial staff.
Key takeaways
- VA loans are mortgages guaranteed by the U.S. Department of Veterans Affairs, available to eligible veterans, active-duty service members and surviving spouses.
- VA loans can be used to purchase a primary residence, refinance a current mortgage or cover renovation costs.
- VA loans offer several benefits, including no required down payment, no private mortgage insurance (PMI) and competitive interest rates.
A VA loan is a great option for you if you’re a qualifying active-duty military personnel or veteran. They often have more relaxed financial requirements than conventional loans, requiring no down payment or private mortgage insurance. They also typically have lower interest rates than FHA and conventional loans.
Here’s a breakdown of what VA loans are, how they work and how you can get one.
What is a VA loan?
A VA loan is a loan guaranteed by the U.S. Department of Veterans Affairs (VA). That’s not to say the VA provides these loans. Instead, mortgage lenders offer VA loans, knowing that the government guarantees them. This makes lenders more confident in lending, often offering a VA loan with a lower interest rate than a conventional mortgage.
The VA doesn’t officially set a credit score requirement for these loans. Instead, it leaves this up to the lender, with lenders requiring anywhere from a 580 to 640 minimum score. VA loans don’t require a down payment, which can make homeownership more attainable for those who qualify because you’ll need less money upfront.
How does a VA loan work?
Getting a VA loan is similar to securing a conventional loan.
Basically, you fill out paperwork from the VA that verifies your eligibility for the program. You also receive what’s known as your entitlement, which is the dollar amount guaranteed on each VA loan. While VA loans technically have no loan limit, lenders might be willing to loan up to four times the amount of your entitlement.
You can get a VA loan with no money down and, unlike other loans, you won’t have to pay for mortgage insurance. That’s because the government guarantees your loan. However, you’ll need to pay a funding fee, which costs a certain percentage of the loan total. This fee keeps the program functioning so future veterans and service members can use it.
VA loan type | Description |
---|---|
VA mortgage | Allows qualified service members to purchase a home with no minimum down payment. |
VA construction loan | Eligible service members can use this loan to build the home of their dreams. |
VA rate-term refinance | Allows service members without an existing VA loan to change their loan term or secure a lower interest rate. |
VA cash-out refinance | Allows service members to swap their conventional mortgage with a VA loan, with an option to turn home equity into cash if needed. |
IRRRL loan | Allows service members to replace a VA mortgage with a VA Interest Rate Reduction Refinance Loan (IRRRL), which can offer lower interest rates. It can also be used to change from an adjustable-rate loan to a fixed-rate loan. |
VA rehab and refinance | Can be used by service members to finance the cost of improvements made to the home. |
VA jumbo loan | Allows service members to finance a home with a sales price exceeding the conforming loan limits. |
Native American loan | Available to Native American veterans to help them purchase, build, improve or refinance a home located on federal trust land. |
Who qualifies for a VA loan?
The VA sets service requirements for active-duty military personnel and veterans to qualify for a VA loan. You can check the full eligibility requirements on the VA’s website, but the basics are:
- You’re currently on active military duty, or you’re a veteran who was honorably discharged and met the minimum service requirements.
- You served at least 90 consecutive active days during wartime or at least 181 consecutive days of active service during peacetime.
- Or, you served for more than six years in the National Guard or Selective Reserve.
- If your spouse died in the line of duty, you may qualify for a VA loan.
The first step in applying for a VA loan is getting a VA Certificate of Eligibility (COE). This certificate shows the lender that you meet the VA loan requirements for eligibility.
How to apply for a VA loan Certificate of Eligibility (COE)
You can get a VA loan Certificate of Eligibility by applying through your eBenefits portal online or applying through your lender.
To apply, you need to provide some data based on your current status. Veterans need to provide a DD Form 214, and active-duty service members need a signed statement of service. A statement of service should include:
- Full name
- Date of birth
- Social Security number
- The date you started duty
- Any lost time
- Name of the command providing the information
Different requirements may apply for National Guard or Reserve members, as well as surviving spouses. You can find more information through the VA’s benefits website, or by speaking to a qualified lender.
Other VA loan requirements
You should also keep these VA loan requirements and rules in mind:
- VA loan limit: As of 2020, if you have full entitlement, there is no limit on the size of your loan. However, your lender may impose its own terms, and your entitlement will still be pegged to conforming mortgage limits.
- You do have a home loan limit if you have remaining entitlement: You have an active VA loan you’re still paying back; or you paid a previous VA loan in full and still own the home; or you refinanced your VA loan into a non-VA loan and still own the home; or you had a compromise claim (or short sale) on a previous VA loan and didn’t repay it in full; or you had a deed in lieu of foreclosure on a previous VA loan; or you had a foreclosure on a previous VA loan and didn’t repay it in full.
- If you have remaining entitlement, your VA home loan limit is based on the county loan limit where you live. This means that if you default on your loan, the VA will pay your lender up to 25 percent of the county loan limit minus the amount of your entitlement you’ve already used. Check your county loan limit here.
- Property type: Investment properties and vacation homes cannot be purchased using VA loan proceeds. Furthermore, you must occupy the home and use it as your primary residence.
- Credit score: The VA does not specify a minimum credit score requirement. However, borrowers might have a hard time getting approved by a lender if they don’t have at least a 620 FICO Score.
- Income: Borrowers need to show they have the income to make the mortgage payments. It’s equally important to not have a huge debt load since the lender will assess your debt-to-income ratio (DTI), or the percentage of your monthly income that’s spent on debt payments.
- Assets and down payment: There is no down payment requirement for VA loans, but the lender may have overlays (or specific criteria) that mandate a down payment in place for borrowers with lower credit scores.
- Reserve funds: Many lenders require borrowers to have an adequate amount of reserves — generally two to three months of mortgage payments — before clearing you to close on your loan.
It’s also possible to use home loan benefits after bankruptcy, as long as sufficient time has passed, typically two years after filing for Chapter 7 bankruptcy or 12 months after Chapter 13 bankruptcy.
VA home loan pros and cons
For those who are eligible, VA loans have many benefits, but they also have drawbacks to consider.
Pros of a VA loan
Some of the key advantages of VA loans include:
- Lower borrowing costs: VA loans can be cheaper than their conventional mortgage counterparts.
- No down payment: VA loans allow you to purchase a home with zero down payment, making homeownership more accessible for those who may struggle to save a large lump sum. You need at least 3 percent down for a conventional mortgage.
- No mortgage insurance: Unlike many other types of mortgages, VA loans do not require you to pay private mortgage insurance (PMI), potentially saving you hundreds of dollars per month.
- Competitive interest rates: Because the government guarantees these loans, lenders are able to offer lower interest rates than you’d typically find with conventional loans.
- Capped lender fees: The VA limits lender fees (like loan origination fees) to 1 percent of the loan amount. This can result in lower closing costs than other loan types.
Cons of a VA loan
Despite the many benefits, VA loans also have a few downsides to consider:
- VA funding fee: VA loans come with a funding fee that can vary depending on your military category, down payment amount and whether you’ve previously used a VA loan. You can finance this fee into the loan amount, adding to the total cost of the loan, or you can pay it upfront at closing.
- Limited to primary residences: You can only use VA loans to purchase a primary residence, not vacation homes or investment properties. However, you can buy up to a four-unit property with a VA loan as long as one unit is your primary residence.
- Not all properties qualify: Not every property will meet the VA’s minimum property requirements (MPRs), which can limit your potential housing options.
- Longer closing process: The VA loan process can take slightly longer than other loan types due to extra steps such as the VA appraisal.
How to apply for a VA loan
After you’ve obtained your COE and are ready to apply, there are a few steps you need to take:
- Gather your financial paperwork.
- Look for lenders that offer VA loans.
- Get approved for a VA loan through at least three lenders.
- Compare each lender’s offer and choose the best option.
- Shop for a home and submit an offer.
- Have a seller accept your offer and get a signed purchase agreement with the seller.
- Get a VA home appraisal and inspection.
- Work with the lender through the underwriting process, promptly responding to questions and requests for documentation.
If you’re struggling with your VA loan, there’s extra help available. The VA can help you negotiate with your lender if you can’t make payments. With the help of the VA, it’s possible to avoid foreclosure through loan modification or other repayment plans. Call 877-827-3702 if you need help.
VA loan FAQ
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VA loans can have term lengths of 10 to 30 years. In addition, they can be fixed-rate or adjustable-rate mortgages (ARMs). The interest rates for VA loans are typically lower than those for conventional loans, mainly because the VA guarantees a portion of the loan, which reduces the risk for the lender. These rates change frequently, so check Bankrate’s VA home loan rates to compare offers from different lenders.
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A key feature of VA loans is the entitlement. This is the amount of the loan that the VA will guarantee to the lender if you default. There are two types of entitlement:
- Basic entitlement: Up to $36,000 for loans worth less than $144,000, or 25 percent for loans of that amount or more.
- Bonus entitlement: Up to 25 percent of the Federal Housing Finance Agency (FHFA) loan limit, minus the basic entitlement.
If you’re purchasing a loan that costs more than $144,000, the bonus entitlement can be used.
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No, VA loans don’t require PMI or any other mortgage insurance. That’s because the VA loan entitlement usually amounts to more than 20 percent of the home’s value. However, while you won’t need to pay for mortgage insurance, you will have to pay a funding fee.
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As with any mortgage, different lenders have various closing costs. You might need to pay for discount points, a credit check, VA appraisal fees, title insurance and other costs, including local and state taxes. While you don’t have to worry about PMI, you do have to pay a VA funding fee. Your VA funding fee depends on the size of your VA loan down payment, and whether it’s your first-time use of the benefit.
Down payment First-time use Subsequent use 0%-5% 2.15% 3.30% 5%-9.99% 1.50% 1.50% 10% or more 1.25% 1.25% So, while a VA loan down payment isn’t required, it can save you money to make a down payment.
Quick note: Disabled veterans who receive disability benefits are exempt from the VA funding fee.
Also, it’s possible to wrap your VA closing costs into the loan amount. However, that increases how much you need to borrow and can cost you more.
Source: bankrate.com
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Although you’re allowed to sell your own home, doing so is a lot of work. Before you move forward, take time to consider the pros and cons of handling things on your own.
If you’re thinking about putting your house on the market, you may be wondering whether you can sell your own home. Yes, you can, but don’t put up a For Sale sign just yet. Although you’re allowed to sell your own home, doing so is a lot of work. Before you move forward, take time to consider the pros and cons of handling things on your own.
Statistics on FSBO Homes
For sale by owner, better known as FSBO, tells buyers you’re not using a real estate agent or a broker. According to the National Association of REALTORS®, FSBO listings accounted for 10% of all home sales in 2021.
Nearly 30% of owners used word-of-mouth marketing via friends, family members, and neighbors to market their listings. Owners also used yard signs, third-party real estate aggregators, social networking sites, and other FSBO marketing methods to find buyers.
Why Sell Your Own Home?
Many people ask “Can I sell my own home?” because real estate agents receive a commission on every sale they make. The average commission is 6%, with the listing agent receiving slightly more than the buyer’s agent. If your home sells for $300,000, that’s $18,000 in commissions at the average rate.
Then, assuming the listing agent gets 3.5% and the buyer’s agent gets 2.5%, selling your own home would save you $10,500. You could use that money to buy new furniture, cover some of your closing costs, invest in the stock market, or take a vacation.
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Potential Pitfalls of Selling Your Own Home
If you decide to sell your own home, you’ll have to do all the work that a real estate agent would normally do. Some of the most important tasks include:
- Setting a sale price
- Preparing your home for walk-throughs and open houses
- Advertising the property
- Following all relevant real estate laws
- Meeting with potential buyers and their agents
Learning how to do these things is time-consuming, and there’s also the risk you’ll make a serious mistake. For example, if you price your home based on emotions instead of market data, you may have trouble attracting potential buyers.
When you sell your own home, you also lose the opportunity to benefit from an agent’s extensive network of contacts. Experienced agents maintain relationships with plumbers, landscapers, home staging professionals, and other people who can help you get your home ready for the market. If you don’t have these relationships, you may have to wait weeks or even months before a home service provider can add you to their busy schedule.
One of the biggest potential drawbacks to selling your own home is that you may not get as much money as an agent would. The National Association of REALTORS reports that FSBO listings sold for an average of $225,000 in 2021. In contrast, agent-listed homes sold for an average of $330,000.
Tips for Selling Your Home Without an Agent
If you decide to sell your own home, follow these tips to maximize the sale price and reduce the amount of time it takes to find a buyer.
1. Choose the Right Sale Price
When setting a price for your home, you have to think strategically. If it’s priced too high, you’ll have trouble selling. If it’s priced too low, you’ll lose out on potential profit. The price has to be just right to attract a buyer without leaving money on the table. To find the right price, consider these factors.
Recent Sales
A comparative market analysis lists recent sales in your neighborhood, giving you valuable information about local prices. Normally, a real estate agent would provide a CMA report for you, but it’s possible to create your own. To get started, use public records or third-party listing websites to identify sold homes that are approximately the same size and age as your home.
Once you have the initial list, narrow it down by looking for homes that have features similar to yours. For example, if your home has four bedrooms and two bathrooms, you’ll want to include other four-bedroom homes in your analysis.
The market changes quickly, so limit your search to homes sold in the last three months. Once you have a workable list, note the sale price of each listing. If you’re not comfortable creating your own CMA report, consider getting a professional home appraisal.
Location
The location of your home has a big impact on the sale price. Many buyers are willing to pay a premium to move to an excellent school district or reduce the amount of time it takes to get to restaurants, salons, office buildings, and entertainment venues.
Location refers not just to what city you live in but also where your home is situated. If it’s near an airport or a busy street, you may not be able to get as much as you would if it was tucked away at the end of a quiet cul-de-sac.
Condition of the Home
The better your home’s condition, the more money you can get for it. Think top-of-the line appliances, fresh paint, and new flooring. If your home needs repairs or the appliances and flooring are a little outdated, you may have to set a lower price to attract potential buyers.
Market Conditions
Supply and demand have a big impact on home prices in your area. In a seller’s market, the demand for homes outpaces the supply, driving prices higher. Buyers may even get into bidding wars over the most desirable properties. In a buyer’s market, the supply of homes outweighs the demand, driving prices down.
2. Use Multiple Advertising Methods
It would be great if all you had to do was put your listing on social media, but it takes a little more work to sell a home. You may want to use the following marketing methods:
- Newspaper advertisements
- Social media posts
- Yard signs
- Third-party listing websites
- Flyers at local businesses
- Virtual home tours
3. Plan Your Open House Carefully
An open house gives potential buyers a chance to walk through your home and see if it looks just as good in person as it does in photos. Here are a few tips to help you plan a successful open house event:
- Schedule it on a weekend: Many people work during the week, so holding an open house on a Wednesday at 11 a.m. isn’t the best way to attract eager buyers. If possible, schedule your open house for a Sunday afternoon.
- Advertise: Yard signs are helpful, but you should use several advertising methods to make more people aware of your event. Try advertising on a third-party website or posting on social media
- Clean thoroughly: You don’t want potential buyers focusing on dust bunnies, so give your home a thorough cleaning the day before your open house. Before people arrive, straighten your throw pillows, take out the garbage, and do some last-minute tidying.
- Put away personal items: Potential buyers should be able to imagine themselves living in your home. They may have a tough time doing that if you have family photos and other mementos on display. To make your home more appealing, put away personal items before the open house begins.
- Make arrangements for your pets: If possible, take your pets to a family member’s house before your event begins. Some buyers aren’t comfortable with animals, and you’ll have an easier time focusing if you don’t have to worry that one of your pets is going to escape.
4. Consult an Attorney
If you sell your home without an agent, you’re still responsible for following all relevant laws and regulations in your area. To ensure you don’t make a costly mistake, consult an attorney beforehand. A licensed attorney can advise you of your rights and educate you about the potential pitfalls involved in selling real estate.
It’s possible to sell your home without a real estate agent, but it takes a lot of time and effort. If you make a mistake, you can easily lose thousands of dollars in profit, making it critical to do in-depth research before you begin the process. You may also want to research other things before selling or buying a home, such as the state of your finances, your current credit health, or your loan options. Credit.com can help you work to understand these things better, so consider signing up for your free Credit Report Card today
Source: credit.com
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Getting a loan on a home you own outright
If you’re considering a loan on a home you own outright, it’s important to note that when you own your home without any current mortgage, its entire value is equity.
You can utilize this equity by securing a loan against the home’s worth. Multiple mortgage loan options are available, such as a cash-out refinance, home equity loan, or HELOC.
To make the most informed decision, delve deeper into each option and discover which suits your needs best.
Check your loan options. Start here
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Can I get a loan on a house that’s paid for?
Yes, you can get a loan on a home you own outright through a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance.
A home equity loan allows you to borrow a fixed amount of money using your home as collateral and pay it back with interest over a set term. A HELOC, on the other hand, works like a credit card where you can borrow money as you need it up to a certain amount, and pay it back with interest.
- When you take out a home equity loan or a HELOC, the lender will determine the amount of equity you have in your home and use that as collateral for the loan. The amount of equity you have is determined by the difference between the current value of your home and the outstanding balance on your mortgage
- Cash-out refinancing allows you to borrow up to 80% of your home’s appraised value. You’ll repay the loan via monthly payments, just like you did before you paid off your mortgage balance
Keep in mind that taking out a loan on a paid-off house puts your home at risk if you are unable to make payments. If you default on the loan, the lender may foreclose on your home to recoup their losses.
So, before taking out a home equity loan, or HELOC, make sure you can comfortably make the monthly payments and understand the risks involved.
Verify your eligibility. Start here
Home equity loans for a paid-off house
Getting a loan on a house you already own lets you borrow against the value of your home without selling.
The type of loan you’ll qualify for depends on your credit score, debt-to-income ratio (DTI), loan-to-value ratio (LTV), and other factors. But assuming your personal finances are in good shape, you can likely choose from any of the following loan options that we summarized above.
Check your loan options. Start here
1. Cash-out refinance
Cash-out refinancing typically involves applying for a new mortgage to replace an existing one and borrowing cash from your home equity. When you already own your home outright, you aren’t paying off an existing mortgage. So most or all of the loan will come to you as a lump sum of cash.
You can typically borrow up to 80% of your home’s value using a cash-out refinance. However, with the VA cash-out refi, you could potentially get up to 100% of your home’s value. But only veterans and active-duty service members have VA loan eligibility.
Refinancing requires a home appraisal to measure your home’s market value. Unless your home is worth over $1 million, in which case you may be able to get an appraisal waiver. You’ll also pay closing costs, ranging between 2% and 5% of your loan balance.
You can pay closing costs out of pocket, or your lender might be willing to cover part of them in exchange for a higher interest rate. Alternatively, you could roll the closing costs into your loan balance.
Cash-out refinancing typically requires a credit score of at least 620. But a higher score (720 and up) will earn you a lower mortgage rate and help you save on interest costs.
2. Home equity loan
Another option is a home equity loan. As with a cash-out refinance, the amount you can borrow is based on your home’s value. Your loan terms will also depend on your credit score.
Homeowners can typically borrow up to 80% of their home’s equity with a home equity loan, which is also known as a second mortgage. However, some smaller banks and credit unions may allow you to pull out up to 100% of your equity.
Once approved, you’ll receive the entire loan amount in cash to use as you wish. Then you’ll repay the loan with interest by making monthly payments.
Home equity loans have higher interest rates than refinancing but lower interest rates than credit cards or personal loans. Since it’s an installment loan with a fixed interest rate, you’ll also have a fixed monthly payment.
Many lenders set their minimum credit score for a home equity loan between 620 and 700.
Verify your home equity loan eligibility. Start here
3. Home equity line of credit (HELOC)
A home equity line of credit is similar to a home equity loan. But rather than receiving a lump sum of cash, borrowers can draw from a line of credit as needed.
Home equity lines of credit often have a draw period of 10 years, meaning you can borrow from the credit line and repay it as often as you want within that time frame. After the draw period ends, there’s typically a repayment period of up to 20 years, during which you cannot borrow from the HELOC and must repay any outstanding balance with interest.
Check your HELOC options. Start here
A HELOC is a revolving account, like a credit card, so the amount borrowed determines your monthly payment. HELOCs usually have variable interest rates.
How to choose a loan on a home you own outright
Although you have several options when getting a loan on a home you own outright, the right mortgage depends on your specific goals. Here’s how to choose the best loan for your financial situation.
Talk to a lender about your mortgage options. Start here
- You need cash to buy another property. You can purchase a new property with the aid of a cash-out refinance or a home equity loan. Both loans give you a lump sum payment up front and let you extend the fixed repayment term over a longer period of time. HELOCs can have higher interest rates and variable rates, leaving you with less certainty about your future rate and monthly payments HELOCs can have higher interest rates and variable rates, leaving you with less certainty about your future rate and monthly payments
- You want to make home improvements. Home equity loans and HELOCs can be used to improve your home by making renovations or repairs. A home equity loan is great for a single project, while a HELOC is better for completing several projects over many years. You can also use a cash-out refi, but if you extend your loan term, you may pay more in interest over the life of the loan. This could make it harder for you to pay off your mortgage and add value to your home.
- You want to consolidate high-interest debts. A cash-out refinance is a way to use home equity to pay off high-interest debts, such as credit card debt or personal loans. It can be a smart way to save money on interest, but it has risks, such as a risk of foreclosure and using a long-term asset, the value of your real estate, to pay for shorter-term needs
Regardless of the type of loan you choose, request quotes from at least three mortgage lenders to compare interest rates, discount points, and upfront fees. This will help you get the best deal.
Pros and cons of getting a loan on a home you already own
Leveraging a fully paid-off home for a loan comes with its own set of benefits and drawbacks. Here’s what you should consider before opting for a home equity loan.
Verify your home equity loan eligibility. Start here
Pros
- Enjoy cost-effective borrowing. Home loans, when taken against a fully-owned property, typically offer more competitive interest rates than personal loans or credit cards. This is due to the house acting as a guarantee. Moreover, when opting for a new loan like a refinance, the associated closing expenses might be on the lower side
- Unlock most of your home’s value. With no existing liens on your property, such a loan lets you access a large part of your equity. Lenders find this arrangement favorable, knowing you’ve successfully cleared a first mortgage. It’s important to keep in mind that the property’s valuation and your credit history will still determine the loan amount
- Benefit from fixed-rate repayments. Such home loans usually come with fixed interest rates, ensuring consistent monthly outflows throughout the loan’s tenure
- Flexibility in how you use your money. The loan amount can be channeled into various needs, be it home refurbishments, debt clearance, or any significant expenditure
- Potential tax benefits. If the loan amount is reinvested into property enhancements, the interest might be deductible, giving it an edge over other financial products like personal loans or credit cards
Cons
- Your property is on the line. If you default on the home equity loan repayments, you risk losing your fully owned home to foreclosure
- It might cost more than other home loans. Generally, home equity loans have steeper interest rates compared to refinancing options and Home Equity Lines of Credit (HELOCs), making them potentially pricier
- Be prepared for closing costs. Typically, these can range from 2% to 5% of the loan value, adding to the overall cost
- Repayment terms might be rigid. Unlike some other options, such as HELOCs, which offer flexibility in repayment and re-borrowing, home equity loans have a fixed repayment schedule
- Risk of the loan exceeding the property value. If you secure a loan on a home you own outright prior to a downturn in the property market, you might find yourself owing more than the property’s worth
3 things to consider before getting a loan on a home you already own
Considering taking a loan on a home you own outright? It’s an important decision with several facets to consider. Let’s delve into three key aspects:
1. Do you really need the liquidity?
What’s your primary motivation for tapping into equity? If you’re planning significant home improvements that could enhance its market value, that’s a strategic approach.
However, if the goal is to address other debts or make purchases that won’t hold their value, exercise caution. You wouldn’t want to jeopardize your home without good reason.
2. How much do you need to borrow and for how long?
The size of your loan will directly determine your monthly commitments. When considering a larger loan amount, it’s important to evaluate the monthly payments, interest rate, and the loan’s lifespan. If you’ve been enjoying a mortgage-free status for a while, it’s worth reflecting on whether you’re ready to recommit to a long-term debt.
3. Are you financially stable?
A few things to consider here. First, ensure that the monthly payments of the new loan align with your budget without overstretching. You should also ensure the offered rate is competitive and aligns with current market rates.
Lastly, always consider if there might be more suitable alternatives. Sometimes, continuing to save or exploring other financing avenues might be more beneficial.
Remember, leveraging your home’s equity is a significant step, and it’s essential to make decisions that resonate with your long-term goals and financial well-being.
How to get a loan on a home you own outright
Getting a home equity loan on home you own outright can be a smart financial decision, allowing you to tap into the equity you’ve built. It can be used for various purposes, such as home improvement, debt consolidation, or funding a significant purchase.
Verify your home equity loan eligibility. Start here
Here is a step-by-step guide on how to obtain a home equity loan on a fully paid-off house:
- Determine your needs: Before applying for a home equity loan, identify why you need the loan and how much you want to borrow. Keep in mind that borrowing more than you need might lead to increased costs and interest rates.
- Calculate your equity: Equity is the difference between your home’s current market value and any outstanding debts secured by the property. Since your house is paid off, your equity is equal to the current market value of your home. You can calculate your home’s equity using online tools or consulting a local real estate agent.
- Check your credit score: A good credit score is essential for obtaining a home equity loan with favorable terms. Check your credit report for any errors and take steps to improve your credit score, if necessary, by paying off outstanding debts and ensuring timely bill payments.
- Shop around for lenders: Research various financial institutions, including banks, credit unions, and online lenders, to find the best home equity loan terms and interest rates. Compare loan offers and choose the one that best suits your needs.
- Gather necessary documents: Prepare the required documentation, including pay stubs, W-2 forms, bank statements, and tax returns.
- Apply for the loan: Fill out the loan application and provide the required documentation. The lender will review your application and determine whether you qualify for the loan.
- Close the loan: If you are approved for the loan, you will need to sign the loan documents and pay any closing costs or fees associated with the loan.
Once the loan is closed, you will receive the loan proceeds in a lump sum, which you can use for any purpose. Remember that you will be required to make monthly payments on the loan, and failure to do so could result in foreclosure on your home.
Alternatives to getting a loan on a home you own
Mortgages on your current home aren’t always necessary when buying a second home, vacation home, or investment property.
Verify your eligibility. Start here
“You may already have enough savings for a down payment without tapping into your equity,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO.
Before getting a loan on a home you own outright, look into mortgage loans that allow low down payments. Home buyers should consider the following types of loans.
Conventional loans
If you’re buying a new home to use as your primary residence, conventional loans allow financing with as little as a 3% down payment. You could qualify with a credit score as low as 620.
At least a 10% down payment is required for a vacation home, 20% to avoid private mortgage insurance, and 20-25% for a rental or investment property.
Check your conventional loan eligibility. Start here
FHA loans
FHA loans require only a 3.5% down payment, allowing FICO scores as low as 580. You cannot use an FHA loan to purchase a vacation home or an investment property. But you can use one to buy a multi-unit property with up to four units, live in one of the units, and rent out the others.
Check your FHA loan eligibility. Start here
VA loans
VA loans are the best option for eligible veterans and service members due to their low mortgage rates, lack of mortgage insurance, and no down payment. However, they can only be used for a vacation or investment home when buying a multi-unit property with up to four units. You can also use a VA loan to buy a second home, but only if the second home becomes your primary residence.
Check your VA loan eligibility. Start here
Interest rates for a second home
If you’re using cash from your equity to buy another home, make sure you understand how interest rates work on a vacation home, second home, and investment property.
Check your loan options. Start here
Since the new home won’t be your primary residence, you can expect a slightly higher mortgage rate. This rate increase protects the lender because these properties have a higher risk of default. That’s because mortgage lenders know that in the event of financial hardship, homeowners prioritize paying the mortgage on their primary home before a second home or investment property.
But although you’ll pay a higher rate when buying a second home, shopping around and comparing loans can help you save. To see the impact of higher mortgage rates, you can experiment with a mortgage calculator.
FAQ: Loan on a home you own outright
To obtain a loan on a home you own outright, you can approach a financial institution or lender and apply for a home equity loan, HELOC, or cash-out refinance. The process typically involves an assessment of your property’s value, a review of your credit history, and verification of your income sources. Once approved, you can use your home as collateral to secure the loan.
The costs associated with getting a loan on a house you own outright can vary based on the lender and the type of loan. Common expenses include appraisal fees to determine the home’s value, origination fees, title search fees, and potential closing costs. If you’re considering a reverse mortgage, there might be additional fees and insurance costs involved.
If you owe more on your home than its current market value, you’re in a situation known as being u0022underwateru0022 on your mortgage. In such cases, borrowing additional funds against your home can be challenging. Lenders typically want the home’s value to exceed the loan amount to minimize their risk. However, some government programs might assist homeowners in this situation, but a reverse mortgage might not be an option unless there’s sufficient equity in the home.
Typically, for home equity loans, lenders allow you to borrow up to 80-90% of your home’s value. But the maximum amount you can borrow against a home you own outright depends on several factors, including the home’s appraised value, your age (especially if considering a reverse mortgage), current interest rates, and lender-specific guidelines.
Should you mortgage the house you own?
Owning your home outright provides a valuable equity cushion, and it’s exciting when you no longer shoulder the burden of monthly mortgage payments. The good news is that you don’t have to sell your home to access your equity.
Using a cash-out refinance, home equity loan, or home equity line of credit, homeowners can pull cash from their equity and use the money for many different purposes.
Make sure you understand the pros and cons of each type of financing and choose the best one for you based on your specific goals.
Time to make a move? Let us find the right mortgage for you
Source: themortgagereports.com
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How to pick the best loan for home improvements
Home renovations can be expensive. But the good news is that you don’t have to pay out of pocket.
Home improvement loans let you finance the cost of upgrades and repairs to your home.
Some — like the FHA 203(k) mortgage — are specialized for home renovation projects, while second mortgage options — like home equity loans and HELOCs — can provide cash for a remodel or any other purpose. Your best financing option for home improvements depends on your needs. Here’s what you should know.
Check home improvement loan options and rates. Start here
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What is a home improvement loan?
A home improvement loan is a financial tool that allows you to borrow money for various home projects, such as repairs, renovations, or upgrades.
Unlike a secured loan like a second mortgage, home improvement loans are often unsecured personal loans, meaning you don’t have to put up your home as collateral. You get the money in a lump sum and pay it back over a predetermined period, which can range from one to seven years.
Now, you might be wondering how this is different from a home renovation loan. While the terms are often used interchangeably, there can be subtle differences.
Home improvement loans are generally more flexible and can be used for any type of home project, from installing a new roof to landscaping. Home renovation loans, on the other hand, are often more specific and may require you to use the funds for particular types of renovations, like kitchen or bathroom remodels.
How does a home improvement loan work?
So, you’ve decided to spruce up your home, and you’re considering a home improvement loan. But how does it work? Once you’re approved, the lender will give you the money in a lump sum. You start repaying the loan almost immediately, usually in fixed monthly installments. The interest rate you’ll pay depends on various factors, including your credit score and the lender’s terms.
Be mindful of additional costs like origination fees, which can range from 1% to 8% of the loan amount. Unlike a credit card, where you can keep using the available credit as you pay it off, the loan amount is fixed. If you find that you need more money for your project, you’ll have to apply for another loan, which could affect your credit score.
Home improvement loan rates
Interest rates for home improvement loans can vary widely, generally ranging from 5% to 36%. Your credit score plays a significant role in determining your rate—the better your credit, the more favorable your rate. Some lenders even offer an autopay discount if you link a bank account for automatic payments.
You can also prequalify to check your likely interest rate without affecting your credit score, making it easier to plan for the loan purpose, whether it’s a new kitchen or fixing a leaky roof.
So, whether you’re dreaming of solar panels or finally fixing up your master bedroom, a home improvement loan can be a practical way to finance your projects. Just make sure to read the fine print and understand all the terms, including any potential autopay discounts and bank account requirements, before you apply.
Types of home improvement loans
1. Home equity loan
A home equity loan (HEL) is a financial instrument that lets you borrow money using the equity you’ve built up in your home as collateral. The equity is determined by subtracting your existing mortgage loan balance from your current home value. Unlike a cash-out refinance, a home equity loan “issues loan funding as a single payment upfront. It’s similar to a second mortgage,” says Bruce Ailion, Realtor and real estate attorney. “You would continue making payments on your original mortgage while repaying the home equity loan.”
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This kind of loan is particularly useful for big, one-time expenditures like home remodeling. It offers a fixed interest rate, and the loan terms can range from five to 30 years. You could potentially borrow up to 100% of your home’s equity.
However, there are some cons to consider. Since you’re essentially taking on a second loan, you’ll have an additional monthly payment if you still have a balance on your original mortgage. Also, the lender will usually charge closing costs ranging from 2% to 5% of the loan balance, as well as potential origination fees. Because the loan provides a lump-sum payment, careful budgeting is necessary to ensure the funds are used effectively.
As a bonus, “a home equity loan, or HELOC, may also be tax-deductible,” says Doug Leever with Tropical Financial Credit Union, member FDIC. “Check with your CPA or tax advisor to be sure.”
2. HELOC (home equity line of credit)
A Home Equity Line of Credit (HELOC) is another option for tapping into your home’s equity without going through the process of a full refinance. Unlike a standard home equity loan that provides a lump sum upfront, a HELOC functions more like a credit card. You’re given a pre-approved limit and can borrow against that limit as you need, paying interest only on the amount you’ve actually borrowed.
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While there’s more flexibility because you don’t have to borrow the entire amount at once, be aware that by the end of the term, “the loan must be paid in full. Or the HELOC can convert to an amortizing loan,” says Ailion. “Note that the lender can be permitted to change the terms over the loan’s life. This can reduce the amount you can borrow if, for instance, your credit goes down.”
The pros of a HELOC include minimal or potentially no closing costs, and loan payments that vary according to how much you’ve borrowed. It offers a revolving balance, which means you can re-use the funds after repayment. This kind of financial instrument may be ideal for ongoing or long-term projects that don’t require a large sum upfront.
“HELOCs offer flexibility, and you only pull money out when needed, within the maximum loan amount. And the credit line is available for up to 10 years, which is your repayment period.” Leever says.
3. Cash-out refinance
A cash-out refinance is a viable option if you’re considering home improvements or other significant financial needs. When opting for a cash-out refinance, you essentially take on a new, larger mortgage than your existing one and then pocket the difference in cash.
This cash comes from your home’s value and can be used for various purposes, including home improvement projects like finishing a basement or remodeling a kitchen. However, the money can also be used for other things, like paying off high-interest debt, covering education expenses, or even buying a second home. Importantly, a cash-out refinance is most beneficial when current market rates are lower than your existing mortgage rate.
Check your eligibility for a cash-out refinance. Start here
The advantages of going for a cash-out refinance include the opportunity to reduce your mortgage rate or loan term, which could potentially result in paying off your home earlier. For instance, if you initially had a 30-year mortgage with 20 years remaining, you could refinance to a 15-year loan, effectively paying off your home five years ahead of schedule. Plus, you only have to worry about one mortgage payment.
However, there are downsides. Cash-out refinances tend to have higher closing costs that apply to the entire loan amount, not just the cash you’re taking out. The new loan will also have a larger balance than your current mortgage, and refinancing effectively restarts your loan term length.
4. FHA 203(k) rehab loan
The FHA 203(k) rehab loan is backed by the Federal Housing Administration that consolidates the cost of a home mortgage and home improvements into a single loan, which makes it particularly useful for those buying fixer-uppers.
Check your eligibility for an FHA 203(k) loan. Start here
With this program, you don’t need to apply for two different loans or pay closing costs twice; you finance both the house purchase and the necessary renovations at the same time. The loan comes with several benefits like a low down payment requirement of just 3.5% and a minimum credit score requirement of 620, making it accessible even if you don’t have perfect credit. Additionally, first-time home buyer status is not a requirement for this loan.
However, there are some limitations and downsides to be aware of. The FHA 203(k) loan is specifically designed for older homes in need of repairs, rather than new properties. The loan also includes both upfront and ongoing monthly mortgage insurance premiums. Renovation costs have to be at least $5,000, and the loan restricts the use of funds to certain approved home improvement projects.
According to Jon Meyer, a loan expert at The Mortgage Reports, “FHA 203(k) loans can be drawn out and difficult to get approved. If you go this route, it’s important to choose a lender and loan officer familiar with the 203(k) process.”
5. Unsecured personal loan
If you’re looking to finance home improvements but don’t have sufficient home equity, a personal loan could be a viable option. Unlike home equity lines of credit (HELOCs), personal loans are unsecured, meaning your home is not used as collateral. This feature often allows for a speedy approval process, sometimes getting you funds on the next business day or even the same day.
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The repayment terms for personal loans are less flexible, usually ranging between two and five years. Although you’ll most likely face closing costs, personal loans can be easier to access for those who don’t have much home equity to borrow against. They can also be a good choice for emergency repairs, such as a broken water heater or HVAC system that needs immediate replacement.
However, there are notable downsides to consider. Unsecured personal loans generally have higher interest rates compared to HELOCs and lower borrowing limits. The short repayment terms could put financial strain on your budget. Additionally, you may encounter prepayment penalties and expensive late fees. Financial expert Meyer describes personal loans as the “least advisable” option for homeowners, suggesting that they should be considered carefully and perhaps as a last resort.
6. Credit cards
Using a credit card can be the fastest and most straightforward way to finance your home improvement projects, eliminating the need for a lengthy loan application. However, you’ll need to be cautious about credit limits, especially if your renovation costs are high.
You might need a card with a higher limit or even multiple cards to cover the costs. The interest rates are generally higher compared to home improvement loans, but some cards offer an introductory 0% annual percentage rate (APR) for up to 18 months, which can be a good deal if you’re sure you can repay the balance within that time frame.
Check home improvement loan options and rates. Start here
Credit cards might make sense in emergency situations where you need immediate funding. For longer-term financing, though, they’re not recommended. If you do opt for credit card financing initially, you can still get a secured loan later on to clear the credit card debt, thus potentially saving on high-interest payments.
How do you choose the best home improvement loan for you?
The best home improvement loan will match your specific lifestyle needs and unique financial situation. So let’s narrow down your options with a few questions.
Check your home improvement loan options. Start here
Do you have home equity available?
If so, you can access the lowest rates by borrowing against the equity in your home with a cash-out refinance, a home equity loan, or a home equity line of credit.
Here are a few tips for choosing between a HELOC, home equity loan, or cash-out refi:
- Can you get a lower interest rate? If so, a cash-out refinance could save money on your current mortgage and your home improvement loan simultaneously
- Are you doing a big, single project like a home remodel? Consider a simple home equity loan to tap into your equity at a fixed rate
- Do you have a series of remodeling projects coming up? When you plan to remodel your home room by room or project by project, a home equity line of credit (HELOC) is convenient and worth the higher loan rate compared to a simple home equity loan
Are you buying a fixer-upper?
If so, check out the FHA 203(k) program. This is the only loan on our list that bundles home improvement costs with your home purchase loan. Just review the guidelines with your loan officer to ensure you understand the disbursement of funds rules.
Taking out just one mortgage to cover both needs will save you money on closing costs and is ultimately a more straightforward process.
“The only time I’d recommend the FHA203(k) program is when buying a fixer-upper,” says Meyer. “But I would still advise homeowners to explore other loan options as well.”
Do you need funds immediately?
When you need an emergency home repair and don’t have time for a loan application, you may have to consider a personal loan or even a credit card.
Which is better?
- Can you get a credit card with an introductory 0% APR? If your credit history is strong enough to qualify you for this type of card, you can use it to finance emergency repairs. But keep in mind that if you’re applying for a new credit card, it can take up to 10 business days to arrive in the mail. Later, before the 0% APR promotion expires, you can get a home equity loan or a personal loan to avoid paying the card’s variable-rate APR
- Would you prefer an installment loan with a fixed rate? If so, apply for a personal loan, especially if you have excellent credit
Just remember that these options have significantly higher rates than secured loans. So you’ll want to reign in the amount you’re borrowing as much as possible and stay on top of your payments.
How to get a home improvement loan
Getting a home improvement loan is similar to getting a mortgage. You’ll want to compare rates and monthly payments, prepare your financial documentation, and then apply for the loan.
Check home improvement loan options and rates. Start here
1. Check your financial situation
Check your credit score and debt-to-income ratio. Lenders use your credit report to establish your creditworthiness. Generally speaking, lower rates go to those with higher credit scores. You’ll also want to understand your debt-to-income ratio (DTI). It tells lenders how much money you can comfortably borrow.
2. Compare lenders and loan types
Gather loan offers from multiple lenders and compare costs and terms with other types of financing. Look for any benefits, such as rate discounts, a lender might provide for enrolling in autopay. Also, keep an eye out for disadvantages, including minimum loan amounts or expensive late payment fees.
3. Gather your loan documents
Be prepared to verify your income and financial information with documentation. This includes pay stubs, W-2s (or 1099s if you’re self-employed), and bank statements, to name a few.
4. Complete the loan application process
Depending on the lender you choose, you may have a fully online loan application, one that is conducted via phone and email, or even one that is conducted in person at a local branch. In some cases, your mortgage application could be a mix of these options. Your lender will review your application and likely order a home appraisal, depending on the type of loan. You’ll get approved and receive funding if your finances are in good shape.
Get started on your home improvement loan. Start here
Home improvement loan lenders
When considering a home improvement loan, it’s necessary to explore various lending options to find the one that best suits your needs. The lending landscape for home improvement is diverse, featuring traditional banks, credit unions, and online lenders. Each type of lender offers different interest rates, loan terms, and eligibility criteria.
It’s advisable to prequalify with multiple lenders to get an estimate of your loan rates, which generally doesn’t affect your credit score. This way, you can compare offers and choose the most favorable terms for your renovation project.
Among the popular choices in the market, Sofi and LightStream stand out for their competitive rates, easy online application, and customer-friendly terms. Both are equal housing lenders, ensuring they adhere to federal anti-discrimination laws. In addition to these, other lenders like Wells Fargo and LendingClub also offer home improvement loans with varying terms and conditions.
How can I use the money from a home improvement loan?
When you do a cash-out refinance, a home equity line of credit, or a home equity loan, you can use the proceeds on anything — even putting the cash into your checking account. You could pay off credit card debt, buy a new car, pay off student loans, or even fund a two-week vacation. But should you?
It’s your money, and you get to decide. But spending home equity on improving your home is often the best idea because you can increase the value of your home. Spending $40,000 on a new kitchen remodel or $20,000 on finishing your basement could add significant value to your home. And that investment would be appreciated along with your home.
That said, if you’re paying tons of interest on credit card debt, using your home equity to pay that off would make sense, too.
Average costs of home renovations
Home renovations can vary widely in cost depending on the scope of the project, the quality of the materials used, and the region where you live. However, here’s a general idea of what you might expect to pay for various types of home renovations.
Renovation Type | Average Cost Range |
Kitchen Remodel | $10,000 – $50,000 |
Bathroom Remodel | $5,000 – $25,000 |
Master Bedroom Remodel | $1,500 – $10,000 |
New Roof | $5,000 – $11,000 |
Exterior Paint | $6,000 – $20,000 |
Interior Paint | $1,500 – $10,000 |
New Deck | $15,000 – $40,000 |
Solar Panel Installation | $15,000 – $25,000 |
Window Replacement | $5,000 – $15,000 |
The information is based on data from HomeGuide.com and is current as of August 2023.
Please note that these are just average figures, and the actual costs can vary. For instance, a high-end kitchen remodel could cost significantly more, especially if you’re planning to use custom cabinetry and high-end appliances. Similarly, the cost of a new deck can vary depending on the size and type of materials used.
Home improvement loans FAQ
Check home improvement loan options and rates. Start here
The best loan for home improvements depends on your finances. If you have accumulated a lot of equity in your home, a HELOC, or home equity loan, might be suitable. Or, you might use a cash-out refinance for home improvements if you can also lower your interest rate or shorten the current loan term. Those without equity or refinance options might use a personal loan or credit cards to fund home improvements instead.
That depends. We’d recommend looking at your options for a refinance or home equity-based loan before using a personal loan for home improvements. That’s because interest rates on personal loans are often much higher. But if you don’t have a lot of equity to borrow from, using a personal loan for home improvements might be the right move.
The credit score requirements for a home improvement loan depend on the loan type. With an FHA 203(k) rehab loan, you likely need a good credit score of 620 or higher. Cash-out refinancing typically requires at least 620. If you use a HELOC, or home equity loan, for home improvements, you’ll need a FICO score of 680–700 or higher. For a personal loan or credit card, aim for a score in the low-to-mid 700s. These have higher interest rates than home improvement loans, but a stronger credit profile will help lower your rate.
If you’re buying a fixer-upper or renovating an older home, the best renovation loan might be the FHA 203(k) mortgage. The 203(k) rehab loan lets you finance (or refinance) the home and renovation costs into a single loan, so you avoid paying double closing costs and interest rates. If your home is newer or of higher value, the best renovation loan is often a cash-out refinance. This lets you tap the equity in your current home and refinance into a lower mortgage rate at the same time.
Home improvement loans are generally not tax-deductible. However, if you finance your home improvement using a refinance or home equity loan, some of the costs might be tax-deductible.
Disclaimer: The Mortgage Reports do not provide tax advice. Be sure to consult a tax professional if you have any questions about your taxes.
Shop around for your best home improvement loan
As with anything in life, it pays to compare all your options. So don’t just settle on the first loan offer you find.
Compare lenders, mortgage types, rates, and terms carefully to find the best loan for home improvements.
Time to make a move? Let us find the right mortgage for you
Source: themortgagereports.com
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Why use an FHA loan?
FHA loans have been making homeownership more accessible for decades. Tailored to borrowers with lower credit, the FHA makes it possible to buy a house with a credit score of just 580 and only 3.5% down.
But home buyers aren’t the only ones who can benefit. For current homeowners, an FHA refinance may let you access low rates and home equity, even without great credit.
Not sure whether you’ll qualify for a mortgage? Check out the FHA program. You might be surprised.
Verify your FHA loan eligibility. Start here
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>Related: How to buy a house with $0 down: First-time home buyer
What is an FHA loan?
An FHA loan is a mortgage insured by the Federal Housing Administration (FHA).
FHA insurance protects mortgage lenders, allowing them to offer loans with low interest rates, easier credit requirements, and low down payments (starting at just 3.5%).
Thanks to their flexibility and low rates, FHA loans are especially popular with first-time home buyers, home shoppers with low or moderate incomes, and/or lower-credit home buyers.
But FHA financing isn’t limited to a certain type of buyer — anyone can apply.
Verify your FHA loan eligibility. Start here
How does an FHA loan work?
The first thing to know about FHA mortgages is that the Federal Housing Administration doesn’t actually lend you the money. You get an FHA mortgage loan from an FHA-approved bank or lender, just like you would any other type of home mortgage loan.
The FHA’s role is to insure these mortgages, offering lenders protection in case borrowers can’t pay their loans back. In turn, this lets mortgage lenders offer FHA loans with lower interest rates and looser standards for qualifying.
The one catch — if you want to call it that — is that you pay for the FHA insurance that protects your mortgage lender. This is called “mortgage insurance premium” or MIP for the life of the loan or until the FHA home loan is refinanced into another type of mortgage. We go over this in detail below.
Types of FHA loans
FHA loans offer various options to meet different home buying needs. These government-backed loans are designed to make homeownership more accessible, especially for those with less-than-perfect credit scores or limited savings.
Each type of FHA loan is tailored to different financial situations and home buying needs. Here’s what you can expect.
Compare FHA loan quotes from multiple lenders. Start here
FHA mortgage loan
An FHA mortgage is ideal for first-time home buyers, requiring a minimum credit score of 580 for a 3.5% down payment. Those with credit scores between 500 and 579 can still qualify for a 10% down payment. These loans are popular due to their lenient credit score requirements and low-down payment options.
FHA rate-and-term refinance
An FHA refinance loan is suited for borrowers looking to improve their loan terms or lower interest rates, especially if their credit scores have improved since obtaining their original mortgage. It offers a way to adjust loan terms to better fit current financial situations.
FHA Streamline Refinance
For current FHA loan holders, the FHA Streamline Refinance provides an efficient way to refinance with minimal documentation and underwriting. It often results in lower interest rates and can potentially reduce mortgage insurance premiums. This option is advantageous for those who want to refinance without a complicated process.
FHA cash-out refinance
An FHA cash-out refinance allows homeowners to tap into their home equity, converting it into cash. It requires a minimum credit score of 620, and borrowers must leave at least 15% equity in their home after the refinance. It’s suitable for those needing extra funds for expenses or investments.
FHA Home Equity Conversion Mortgage (HECM)
HECM is a reverse mortgage for homeowners aged 62 and older, allowing the conversion of home equity into cash. It provides financial flexibility for seniors by enabling access to their home equity without selling the home.
FHA 203(k) loan
The FHA 203(k) loan is designed for home purchases requiring renovations. It combines the cost of the home and renovation expenses into one loan. Borrowers must meet specific credit score requirements and ensure that renovations are completed within six months.
FHA Energy Efficient Mortgage
This loan type allows borrowers to include energy-efficient upgrades in their FHA loan. It’s aimed at reducing utility costs and increasing the home’s environmental friendliness, thereby potentially increasing its value.
Section 245(a) loan
The Section 245(a) program is for borrowers expecting an increase in their income. It offers a graduated payment schedule that starts low and increases over time, aligning with anticipated income growth. This loan is particularly beneficial for young professionals expecting career advancement.
Check your FHA loan eligibility. Start here
FHA loan requirements
Homeownership can be a liberating experience, especially for first-time buyers. With their flexible guidelines and government backing, FHA home loans provide a welcoming path.
Understanding FHA loan requirements can make the process much easier, opening the door to a future in your ideal home.
Check your FHA loan eligibility. Start here
To be eligible for an FHA loan, applicants must adhere to specific guidelines:
- The property must undergo a home appraisal by an FHA-approved appraiser.
- The property must serve as the applicant’s primary residence; investment properties and second homes are not eligible.
- Occupancy of the property is required within two months following the closing.
- A mandatory inspection is conducted to ensure the property meets FHA’s basic standards.
There are a few more specific conditions to qualify, such as a down payment amount, mortgage insurance, credit score, loan limits, and income requirements.
FHA loan down payment requirements
FHA loans require a minimum down payment, which varies based on credit score. For credit scores of 580 and above, a minimum down payment of 3.5% is required. Borrowers with credit scores between 500 and 579 must make a 10% down payment.
FHA mortgage insurance premiums
FHA mortgage insurance premium (MIP) is what makes the FHA program possible. Without the MIP, FHA-approved lenders would have little reason to make FHA-insured loans.
There are two kinds of MIP required for an FHA loan. One is paid as a lump sum when you close the loan, and the other is an annual premium, which becomes less expensive each year as you pay off the loan balance:
- Upfront Mortgage Insurance Premium (UFMIP) = 1.75% of the loan amount for current FHA loans and refinances
- Annual Mortgage Insurance Premium (MIP) = 0.85% of the loan amount for most FHA loans and refinances
MIP is split into monthly payments that are included in your mortgage payment. You’ll have to pay FHA insurance for the life of the loan or if you refinance into another type of mortgage loan.
The good news is that, as a homeowner or home buyer, your FHA loan’s MIP rates have dropped. Today’s FHA MIP costs are now as much as 50 basis points (0.50%) lower per year than they were in previous years.
Also, you have ways to reduce what you’ll owe in FHA MIP.
Depending on your down payment and loan term, you can reduce the length of your mortgage insurance to 11 years instead of the entire loan.
Loan term | Original down payment | MIP duration |
20, 25, 30 years | Less than 10% | Life of loan |
20, 25, 30 years | More than 10% | 11 years |
15 years or less | Less than 10% | Life of loan |
15 years or less | More than 10% | 11 years |
Or, you could refinance out of FHA MIP at a later date.
With FHA interest rates as competitive as they are today, refinancing could reduce your monthly mortgage payments and cancel your mortgage insurance premium if you have enough equity in the home.
Check your FHA loan rates. Start here
FHA loan credit score minimums
The minimum credit score requirement for an FHA loan is 500. However, a score of 580 or higher allows for a lower down payment. Credit scores directly impact loan terms and down payment amounts.
Debt-to-income ratio
FHA loans consider the borrower’s debt-to-income (DTI) ratio, a measure of monthly debt payments against monthly income. The FHA prefers a DTI ratio of no more than 43%, though exceptions can be made for higher ratios with compensating factors.
Income and employment requirements
There is no specific income threshold for FHA loans, but borrowers must demonstrate steady employment history. Verification includes pay stubs, W-2s, tax returns, and bank statements.
FHA loan limits
Loan limits for FHA loans vary by county. However, starting January 1, 2024, the new FHA loan limit will be $498,257 for a single-family home in most parts of the country. Limits increase for 2-, 3-, and 4-unit properties.
FHA loan rates
Interest rates for FHA loans are competitive and can vary based on factors such as prevailing market rates, borrower’s credit score, income, loan amount, down payment, and DTI ratio. Government backing often enables lenders to offer lower rates compared to conventional mortgages.
Compare your FHA loan rates from multiple lenders. Start here
Today’s rates for a 30-year, fixed-rate FHA loan start at % (% APR), according to The Mortgage Reports’ daily rate survey.
Thanks to their government backing, FHA loan rates are competitive even for lower-credit borrowers. But interest rates can vary a lot from one lender to the next, so be sure to shop around for your best offer.
FHA loan benefits
Check your FHA loan eligibility. Start here
1. Lower down payment: Just 3.5 %
For today’s home buyers, there are only a few mortgage options that allow for down payments of 5% or less. The FHA loan is one of them.
With an FHA mortgage, you can make a down payment as small as 3.5% of the home’s purchase price. This helps home buyers who don’t have a lot of money saved up for a down payment along with home buyers who would rather save money for moving costs, emergency funds, or other needs.
2. FHA allows 100% gift funds for the down payment and closing costs
The FHA is generous with respect to using gifts for a down payment. Very few loan programs will allow your entire down payment for a home to come from a gift. The FHA will.
Via the FHA, your entire 3.5% down payment can be a gift from parents or another family member, an employer, an approved charitable group, or a government homebuyer program.
If you’re using a down payment gift, though, you’ll need to follow the process for gifting and receiving funds.
3. FHA loans allow higher debt-to-income ratios
FHA loans also allow higher debt-to-income ratios.
Your debt-to-income ratio, or DTI, is calculated by comparing two things: your debt payments and your before-tax income.
For instance, if you earn $5,000 a month and your debt payment total is $2,000, your DTI is 40%.
Officially, FHA maximum DTIs are as follows.
- 31% of gross income for housing costs
- 43% of gross income for housing costs plus other monthly obligations like credit cards, student loans, auto loans, etc.
However, a 43% DTI is actually on the low end for most FHA borrowers. And FHA will allow DTI ratios as high as 50%. Although to get approved at such a high ratio, you’ll likely need one or more compensating factors — for instance, a great credit score, significant cash savings, or a down payment exceeding the minimum.
In any case, FHA is more lenient in this area than other mortgage loan options.
Most conventional mortgage programs — those offered by Fannie Mae and Freddie Mac — only allow debt-to-income ratios between 36% and 43%.
With down payments of less than 25%, for example, Fannie Mae lets you go to 43% DTI for FICOs of 700 or higher. But most people don’t get conventional loans with debt ratios that high.
4. FHA loans accept lower credit scores
Officially, the minimum credit scores required for FHA mortgage loans are:
- 580 or higher with a 3.5% down payment
- 500-579 with a 10% down payment
High credit scores are great if you have them. But past credit history mistakes take a while to repair.
FHA loans can help you get into a home without waiting a year or more for your good credit to reach the “excellent” level. Other loan programs are not so forgiving when it comes to your credit rating.
Fannie Mae and Freddie Mac (the agencies that set rules for conventional loans) say they accept FICOs as low as 620. But in reality, some lenders impose higher minimum credit scores.
5. FHA even permits applicants with no credit scores
What if an applicant has never had a credit account? Their credit report is, essentially, blank.
FHA borrowers with no credit scores may also qualify for a mortgage. In fact, the U.S. Department of Housing and Urban Development (HUD) prohibits FHA lenders from denying an application based solely on a borrower’s lack of credit history.
The FHA allows borrowers to build non-traditional credit as an alternative to a standard credit history. This can be a huge advantage to someone who’s never had credit scores due to a lack of borrowing or credit card usage in the past.
Borrowers can use payment histories on items such as utility bills, cell phone bills, car insurance bills, and apartment rent to build non-traditional credit.
“Not all lenders who are FHA approved offer these types of loans, so check with your loan officer individually,” cautions Meyer.
6. FHA loans can be up to $ in most of the U.S.
Most mortgage programs limit their loan sizes, and many of these limits are tied to local housing prices.
FHA mortgage limits are set by county or MSA (Metropolitan Statistical Area), and range from $ to $ for single-family homes in most parts of the country.
Limits are higher in Alaska, Hawaii, the U.S. Virgin Islands, and Guam, and also for duplexes, triplexes, and four-plexes.
7. FHA also allows extended loan sizes
As another FHA benefit, FHA loan limits can be extended where home prices are more expensive. This lets buyers finance their home using FHA even though home prices have skyrocketed in certain high-cost areas.
In Orange County, California, for example, or New York City, the FHA will insure up to $ for a mortgage on a single-family home.
For 2-unit, 3-unit and 4-unit homes, FHA loan limits are even higher — ranging up to $.
If your area’s FHA’s loan limits are too low for the property you’re buying, you’ll likely need a conventional or jumbo loan.
8. If you have an FHA loan, you can lower your rate with an FHA Streamline Refinance
Another advantage for FHA-backed homeowners is access to the FHA Streamline Refinance.
The FHA Streamline Refinance is an exclusive FHA program that offers homeowners one of the simplest, quickest, and most affordable paths to refinancing.
An FHA Streamline Refinance requires no credit score checks, no income verifications, and home appraisals are waived completely.
In addition, via the FHA Streamline Refinance, homeowners with a mortgage pre-dating June 2009 get access to reduced FHA mortgage insurance rates.
Verify your FHA loan eligibility. Start here
FHA loan disadvantages
What is the downside to an FHA loan? Among the numerous benefits of FHA loans, there are certain disadvantages that potential borrowers should be aware of. These drawbacks can impact the overall cost and flexibility of the loan.
Here are the downsides that you should know about FHA home loans.
FHA loan mortgage insurance premiums
One of the primary drawbacks of FHA loans is the mandatory mortgage insurance premiums. These include an upfront premium at closing, generally 1.75% of the loan amount, and ongoing monthly payments. This additional cost can make FHA loans more expensive over the long term
Loan limits
One notable limitation of FHA loans is the lower loan limits compared to conventional loans, which can be restrictive for higher-income buyers. The FHA mortgage limit for a one-unit property ranges from $ to $ for single-family homes in most parts of the country, which may not be sufficient in areas with higher property values.
Strict property requirements
FHA loans come with stringent property requirements. The purchased home must be the borrower’s primary residence and must meet specific safety and condition standards. This requirement can limit the types of properties that qualify for an FHA loan.
FHA loan alternatives
Alternative loans, like USDA and VA loans, offer distinct advantages, such as no down payment requirements, but come with specific eligibility criteria. Understanding these alternatives ensures you make a well-informed decision about the type of mortgage that’s right for you.
Conventional 97
The Conventional 97 program comes with a down payment requirement of just 3%. It stands out due to the absence of income limits and mandatory home buyer education, making it accessible to a broader range of homebuyers.
Check your conventional loan eligibility. Start here
HomeReady Mortgage by Fannie Mae
The HomeReady mortgage program is designed for low- to moderate-income families, allowing a home purchase with only a 3% down payment. Furthermore, this program permits the entire downpayment and closing costs to be covered by gifts or grants, offering significant financial flexibility.
Freddie Mac Home Possible
The Home Possible loan is notable for its reduced mortgage insurance costs compared to other similar programs. With a 3% down payment requirement and lower ongoing costs, Home Possible is an attractive alternative for those looking to save on mortgage insurance.
USDA loans
USDA loans, backed by the U.S. Department of Agriculture, are an attractive alternative, especially for moderate-income buyers in rural areas. They don’t require a down payment, which is a significant advantage. However, eligibility for USDA loans is restricted based on income and geographical limits, and not every property qualifies for this type of financing.
VA loans
VA loans are another viable alternative, particularly for U.S. military service members, veterans, and certain surviving spouses. Like USDA loans, VA loans also require no down payment. However, eligibility for VA loans is exclusive to the military community, limiting their accessibility to the general public.
FAQ: FHA loans
Yes, FHA loans offer both fixed-rate and adjustable-rate (ARM) options. A fixed-rate FHA loan provides a consistent interest rate and monthly payment for the life of the loan, ideal for those who prefer stability. An adjustable-rate FHA loan, on the other hand, has an interest rate that can change over time, typically offering lower initial rates.
FHA loans often have lower interest rates compared to many conventional loan options. This is largely due to the government backing of FHA loans, which reduces the risk for lenders. As a result, lenders are generally able to offer more competitive mortgage rates to borrowers. However, the actual interest rate you’ll receive on an FHA loan can vary based on several factors, including your credit score, loan amount, and the current market conditions. It’s always a good idea to compare rates from multiple lenders to ensure you’re getting the best deal possible for your situation.
Yes. A little-known FHA benefit is that the agency will allow a home buyer to assume the existing FHA mortgage on a home being purchased. The buyer must still qualify for the mortgage with its existing terms but, in a rising mortgage rate environment, it can be attractive to assume a home seller’s loan. Five years from now, for example, a buyer of an FHA-insured home could inherit a seller’s sub-3 percent mortgage rate. This can make it easier to sell the home in the future.
While you can’t buy a true rental property with an FHA loan, you can buy a multi-unit property — a duplex, triplex, or fourplex — live in one of the units, and rent out the others. The rent from the other units can partially, or even fully, offset your mortgage payment.
Closing costs are about the same for FHA and conventional loans with a couple of exceptions. First, the appraiser’s fee for an FHA loan tends to be about $50 higher. Also, if you choose to pay your upfront MIP in cash (instead of including this 1.75% fee in your loan amount), this one-time fee will be added to your closing costs. Additionally, the fee can be rolled into your loan amount.
Most borrowers will need a minimum credit score of 580 to get an FHA loan. However, home buyers who can put at least 10% down are eligible to qualify with a 500 score. Yet, each lender may have their own credit score minimums, separate to those established by the Federal Housing Administration.
The loan-to-value (LTV) ratio for FHA loans typically cannot exceed 96.5%, meaning you can borrow up to 96.5% of your home’s value. This high LTV ratio is part of what makes FHA loans accessible, especially for first-time homebuyers who might not have substantial savings for a down payment.
For FHA loans, the equivalent of private mortgage insurance (PMI) is the mortgage insurance premium (MIP). MIP is required for all FHA loans, regardless of the down payment or loan-to-value ratio. This insurance protects lenders from losses in case of borrower defaults and is included in both upfront and ongoing mortgage costs.
If you default on an FHA loan, the lender can initiate foreclosure proceedings. The FHA loan program, backed by the Federal Housing Administration, is designed to minimize the risk of defaults by offering more lenient qualification criteria. However, consistent failure to make mortgage payments may lead to foreclosure, impacting your credit score and homeownership status.
Today’s FHA loan rates
Now is an opportune time to consider an FHA loan, with current mortgage rates being historically competitive.
FHA loan interest rates are typically among the most competitive. To capitalize on these favorable rates, start by comparing offers from FHA-approved lenders.
Finding the most affordable loan could be just a few clicks away. Begin your journey towards homeownership today by exploring your options and discovering the best rates available for your financial situation.
Time to make a move? Let us find the right mortgage for you
Source: themortgagereports.com
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Homebuyers looking to escape the hustle and bustle of city life may long for a quieter life in the country. But anytime you’re considering making a major lifestyle change, finances can become an issue.
If this sounds like you, you may be able to qualify for a USDA loan. This government-sponsored loan program focuses on houses located in designated rural and suburban areas.
What is a USDA home loan?
A USDA home loan is a type of mortgage for eligible rural and suburban homebuyers. It’s offered by the United States Department of Agriculture. USDA loans are issued through the USDA Rural Development Guaranteed Housing Loan Program.
One of the biggest draws of the Rural Development program is that it doesn’t require any down payment. So, you can purchase your own home with a minimal amount of cash.
If you think this sounds like a good opportunity, you may be right. Keep reading to find out the benefits of applying for a USDA loan.
What are the different types of USDA loans?
The USDA offers three main mortgage programs for people who want to buy or repair a single-family home in a rural area:
- USDA Direct Loans: Also known as Section 502 direct loans, these loans are issued to qualifying low-income borrowers with interest rates as low as 1% with certain subsidies and no down payment is typically required.
- USDA Guaranteed Loans: Also known as the Section 502 Guaranteed Loan Program, these loans are issued by USDA-approved lenders and offer 100% financing, low interest rates, and minimal down payments to eligible buyers.
- USDA Home Improvement Loans: Also known as the Section 504 Home Repair program, these loans are given to qualified homeowners to repair, improve, or modernize their homes. They’re also given to low-income elderly homeowners to remove health and safety hazards. The home improvement loan is up to $$40,000 and grants are also available up to $10,000. Additionally, loans and grants can now be combined for up to $50,000 in assistance.
- USDA Streamline Refinance: Those with an existing USDA loan may be able to take advantage of lower rates with a USDA refinance loan. For those who qualify, the USDA streamline refinance is an attractive option as it does not require a home appraisal or income documentation. However, to be eligible, you must already have a USDA loan.
How much can I borrow with a USDA loan?
The majority of loans offered by the U.S. Department of Agriculture (USDA) do not feature loan limits. Direct Loans are the only type of USDA loans with specific limits, but they are a small portion of all USDA loans. Therefore, it is unlikely that you will find any limits on your USDA loan.
For the USDA Direct Loan program in 2024, the loan limit is 766,550 in most parts of the country. However, in more expensive high-cost areas, the loan limits are higher.
4 Benefits of a USDA Loan
Listed below are the four biggest advantages of taking out a USDA loan.
1. No down payment
For many people, the thought of scraping together a down payment is the most significant barrier to buying a home. But with a USDA loan, there’s no down payment required. In comparison, you’ll need a 3.5% down payment for FHA loans and a minimum 5% down payment for conventional loans.
2. Low private mortgage insurance (PMI)
Anyone who buys a home with no down payment must purchase private mortgage insurance (PMI). The costs vary, but PMI generally costs between 0.5% to 1.0% of the total loan amount.
With the USDA mortgage program, you still have to purchase PMI, but the rates are lower than they are with a conventional loan.
3. Low credit requirements
USDA loans also come with more flexible credit requirements than what other lenders look for. If your credit score is at least 640, your application should be approved pretty quickly. And the program is available for borrowers that are short on credit history.
4. Finance your closing costs
When you buy a home, the lender charges closing costs for issuing the loan. The closing costs usually fall between 2% and 5% of the total loan amount. So if you buy a $200,000 home, you can expect to pay at least $4,000 in closing costs.
When you take out a USDA loan, you can roll your closing costs into the loan financing. This means you can finance your closing costs instead of paying them out of pocket.
How do you qualify for a USDA loan?
Taking out a USDA loan doesn’t mean you have to move to the middle of nowhere. There are a wide variety of properties eligible for purchase through the USDA loan program.
While you won’t find any homes located in a major metropolitan area, you may be able to find some in certain suburban areas. But, of course, the most extensive selection is available in rural areas since the purpose of the program is to strengthen these communities.
To find out if a home you’re interested in qualifies, simply input the address into the USDA website. The USDA does have strict requirements the home must meet to be eligible for the program, which we’ll discuss in more detail below.
See also: First-Time Home Buyer Grants and Programs
USDA Loan Requirements
If you can’t qualify for a conventional loan, you may be eligible for either a USDA guaranteed loan or a USDA direct loan. Here is an overview of the borrower requirements for USDA home loan programs:
- You must be a U.S. citizen, non-citizen national, or qualified alien.
- The home must be located in an eligible location.
- You must be purchasing the home as your primary residence.
- The loan must be taken out through a USDA-approved lender.
- You must be able to meet the minimum credit requirements.
Income limits
USDA loan programs are designed to help low to middle-income families, so borrowers must meet certain income limitations. To qualify, your household income cannot exceed 115% of the median income in your area.
The income requirements for USDA loans are determined by county, so you can check the USDA’s website to determine the requirements in your area. You can also work with a USDA-approved lender to determine your eligibility.
Property Eligibility
The U.S. Department of Agriculture also puts certain restrictions on the type of property you can buy with a USDA loan. Here are the types of properties that are eligible for a USDA mortgage loan:
- Single-family homes
- New construction homes
- Townhomes and approved condos
- Planned Unit Developments
- Approved modular homes
What credit score do you need for a USDA loan?
If you’re applying for a guaranteed USDA loan, there are a few basic credit requirements you’ll need to meet. The USDA doesn’t set a minimum credit score requirement, but your application will get processed much faster if your credit score is at least 640.
A credit score below 640 doesn’t automatically rule you out, but your application will go through stricter underwriting guidelines. This is to ensure you can handle the monthly payments.
And you’re less likely to be approved if you have any collections on your credit report in the past 12 months. However, you may be granted an exception if you can prove that your credit was damaged because of a medical issue or something outside your control.
And finally, a USDA loan may be a viable option for you if you’re still in the process of building your credit scores. Your application may be approved even if you have a limited credit history if you can supply other credit references, like utility payments or rent payments.
USDA Income Limits
Income limits are set on all USDA loans to ensure the USDA loan program benefits low to middle-income families. These income restrictions are determined by various factors, including the median income for your local city or county. You can check your income eligibility to find out if you qualify.
The size of your family also helps determine your eligibility. If you have a large family, then it’s expected you’ll need a more substantial income to live on, and you’ll receive more leeway.
There are also different tiers of eligibility, depending on the type of USDA loan you’re taking out. For example, USDA guaranteed loans call for a moderate income, whereas USDA direct loans require applicants to fall in the low-income category.
Stable Income
Finally, you must have a stable monthly income to be eligible for a USDA loan. Usually, you need to show a history of stable employment for at least 24 months.
If you have questions about your eligibility, you can contact a mortgage lender that specializes in USDA loans. Just be sure to ask so you don’t waste your time working with a lender who doesn’t understand the nuances of USDA loans.
Real estate agents that work in a rural area may also be able to point you in the right direction, since they’re likely to have more experience with clients utilizing these programs.
Are there any other eligibility requirements?
This article is mainly focused on the USDA’s requirements, but keep in mind, the USDA isn’t lending you any money. Each lender can apply its own requirements as long as they meet the USDA’s basic guidelines. Your lender will want a complete financial picture, as well as your credit history and current employment status.
And one of the guidelines surrounds PITI, which stands for principal, interest, taxes, and insurance. Each of these things are combined to form your total monthly mortgage payment.
This amount can’t be more than 29% of your pre-tax monthly income. So if you make $3,000 per month, your total monthly payment would have to be less than $900.
Debt-to-Income Ratio
Another common requirement is known as your debt-to-income ratio. This is when the lender looks at compares your income to your total monthly debt payments. Ideally, your debt-to-income ratio shouldn’t be higher than 41%.
So if your income is $3,000 per month, your total monthly debt payments should be less than $1,230. And remember, your mortgage will be included in the total debt payments. But you may qualify for a higher debt ratio if your credit score is higher than 680.
Bottom Line
With a USDA mortgage, you can purchase your dream home without having to save up for a down payment. However, not everyone will qualify for this program.
If you’re interested in taking out a USDA loan, you should start by finding out if you meet the income restrictions in your county. And you might consider working with an experienced USDA lender to find out if you’re a suitable candidate for the program.
USDA Loan FAQs
How does a USDA loan work?
USDA loans provide low-interest home mortgages to qualified borrowers. These loans are issued by the United States Department of Agriculture, and are designed to help eligible borrowers purchase homes in rural areas and some suburban areas.
To qualify for a USDA loan, borrowers must typically meet certain income and credit requirements, as well as have a debt-to-income ratio that is lower than the national average. Once approved, the loan is typically issued in the form of a 30-year fixed-rate mortgage, with the interest rate set by the USDA. Borrowers can then use the funds to purchase a home and make mortgage payments over time.
What’s the difference between FHA, VA, and USDA Loans?
FHA loans are mortgage loans insured by the Federal Housing Administration that are available to homebuyers with less-than-perfect credit and relatively low down payments.
VA loans are mortgage loans guaranteed by the U.S. Department of Veterans Affairs that are available to qualifying veterans and military members with competitive terms and no down payment.
USDA loans are mortgage loans offered by the U.S. Department of Agriculture that are available to low-income borrowers in rural areas.
All three loan types require mortgage insurance, but the payment requirements vary.
What is the interest rate on USDA loans?
The interest rate on a USDA loan varies depending on the type of loan, the lender, the borrower’s credit score and other factors. Generally, USDA loan interest rates range from 1.00% to 4.00%.
The current interest rate for Single Family Housing Direct home loans is 3.75%. This fixed rate is based on current market rates at loan approval or loan closing, whichever is lower.
If payment assistance is applied, the interest rate can be as low as 1%. The payback period can be up to 33 years, or 38 years for very low-income applicants who can’t afford the 33-year loan term.
What are the fees associated with a USDA loan?
The upfront guarantee fee is 1% of the amount of the loan, and this fee must be paid at closing. This fee is non-refundable and is not included in the loan amount.
In addition to the upfront fee, there is an annual fee, which ranges from 0.35% to 0.50%. This fee is calculated as a percentage of the loan amount and is generally due each year.
USDA home loans also have other typical closing costs associated with them, such as appraisal fees, title fees, and recording fees.
Source: crediful.com
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Finding the best home loan program for nurses
Home loans for nurses come in various forms, specifically designed to cater to the unique needs of healthcare workers.
Beyond these specialized mortgage options, numerous local and national assistance programs can also offer financial help — like with down payments and closing costs.
Find the best home loan program for you. Start here
However, just because you’re a nurse doesn’t mean a specialized “nurse home loan” is best. You might find you can buy a home more easily with a standard mortgage program. So do your research and choose carefully.
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Are there special home loans for nurses?
Yes, there are special home loans for nurses that are designed to meet their unique financial and professional circumstances. These specialized mortgage options often come with benefits like lower interest rates, reduced down payments, and more flexible qualification criteria.
Additionally, there are grants for nurses and various local and national assistance programs that provide financial aid. These can be particularly helpful in covering down payments and closing costs, making the home-buying process more accessible, especially for nurses who are first-time homebuyers.
6 best home loans for nurses
When looking for the best home loan programs for nurses, it’s worth considering a mix of both specialized and standard options.
We recommend six mortgage programs in total—two are specialized home loans for nurses, while the other four are standard loan programs open to almost anyone. Surprisingly, you may find that a mainstream mortgage program, rather than a nurse-specific one, ends up being your best fit.
Find the best home loan program for you. Start here
To give a quick overview, the six best home loans for nurses are:
- Nurse Next Door program
- Homes for Heroes
- Conventional mortgages
- FHA mortgages
- VA mortgages
- USDA mortgages
Let’s dig into each program in a little more detail.
1. Nurse Next Door program
The Nurse Next Door1 program is not a “true” mortgage loan program. It does not lend money or originate loans. Rather, it’s a home buyer assistance program that will help match you with the right property, mortgage, and aid program for your needs (if required).
Nurse Next Door provides grants for nurses of up to $8,000 (where available) and down payment assistance of up to $10,681. You may also reduce closing costs by eliminating a home appraisal and other fees.
Keep in mind that grants are generally only awarded to nurses and medical professionals who are first-time buyers purchasing a primary residence. This means that you must refrain from using the funds for an investment property or vacation home.
Before you use this program, though, check that you can’t get more generous grants or loans from your state or local down payment assistance program.
2. Homes for Heroes: Healthcare professionals
Homes for Heroes2 is another nationwide homeowner assistance program that aims to make buying a new home more affordable for firefighters, law enforcement, teachers, military, and medical professionals.
The website says, “Most heroes save at least $3,000 when they buy or sell a home with us. When you add up savings from real estate agents, loan officers, title companies, home inspectors, and other everyday deals, the savings are way beyond what you’ll get from other national programs.”
Note that you must use real estate professionals recommended by Homes for Heroes to benefit. Again, check other local programs to ensure this is your best option before buying.
3. Conventional loans for nurses
Conventional mortgages are the most popular type of home loan available today. These loans are not backed by the government, like others on this list, but most conform to the rules laid down by Fannie Mae and Freddie Mac, which are two government-sponsored enterprises. This is why they’re also referred to as “conforming loans.”
Conventional loans require a credit score of 620 or better. But they offer a low down payment option of only 3% of the purchase price to qualify. Although, if your down payment is less than 20%, you’ll need to pay for private mortgage insurance (PMI), which means higher monthly payments.
4. FHA loans for nurses
Nurses and medical professionals with a credit score between 580 and 620 could opt for a mortgage backed by the Federal Housing Administration, an FHA loan. This type of loan is popular with first-time home buyers because of its flexible approval guidelines.
FHA loans also have a low down payment option of 3.5%. But you will have to pay mortgage insurance premiums (MIP) for the life of the loan. Note that MIP is different from private mortgage insurance on a conventional loan. Still, many FHA buyers simply refinance out of mortgage insurance down the road when their credit scores improve.
Consider opting for a conforming loan if you can. Because of those, you can escape mortgage insurance costs more easily and cheaply.
Verify your FHA loan eligibility. Start here
5. VA loans for nurses
Backed by the Department of Veterans Affairs, a VA loan is an option for nurses who have served or are still serving in the military. If you’re eligible, this will likely be your best bet.
Lenders set their own credit score thresholds, usually between 580 and 660. But you need no down payment. And you’ll be in line for a below-market interest rate, no private mortgage insurance, and low closing costs.
VA buyers must pay a one-time VA funding fee that is typically between 2.3% and 3.6% of the loan amount. However, many borrowers roll this fee into their loan balance, so they don’t have to pay it upfront.
Verify your VA loan eligibility. Start here
6. USDA loans for nurses
The US Department of Agriculture backs USDA mortgages. These, too, require no down payment. But you’ll likely need a score of 640 or better. Similar to the VA loan, a USDA mortgage frequently has lower interest rates than the “going” rate.
You must also meet household income limits and buy a home in a designated rural area. Some suburbs are included. Use the USDA’s maps to find out whether the place where you want to buy is eligible.
Find out if you qualify for a USDA loan. Start here
Grants for nurses
Most of the home loan programs for nurses we highlighted above can be used with down payment assistance (DPA) programs, which could help cover your down payment and closing costs.
Check your home buying options. Start here
All states and many cities and counties offer grants and DPA programs for first-time buyers. There are thousands of these across the country. In some places, you can get home buying assistance running into the tens of thousands of dollars.
Some of these down payment assistance programs offer special privileges to nurses and other essential workers. To find one that covers the area where you want to buy, read this article or check out your state’s page on the Department of Housing and Urban Development (HUD) website.
Note that each DPA sets its own eligibility requirements and caps the amount of money it will grant or lend you. So you’ll have to do a bit of research to find out what you could be in line for and whether you qualify.
Nurse home loans from private lenders
Some private mortgage lenders offer reduced closing costs or other perks for nurses. For example, Homes for Champions (RealFi Home Funding Corp.) says that it’s offering for nurses and doctors can save you “up to 2.00% to 3.00%” by eliminating many fees normally due on closing.
But this company is a licensed direct lender in only 13 states, plus Washington DC: CT, DE, FL, GA, MD, NC, NJ, NY, PA, SC, TX, and VA.
Find the best home loan program for you. Start here
Other companies or organizations also offer help to homebuyers who are nurses.
One such program is the Everyday Hero Housing Housing Assistance Fund. It seems that it refunds seller concessions negotiated by specialist real estate agents. You wouldn’t be alone in assuming that’s a scam. Although it has an A+ rating with the Better Business Bureau. So it may be worth checking out. Remember that seller concessions are hard to obtain in sellers’ markets, which most are at the time of this writing.
Meanwhile, Nurse Home Loan Programs says its goal is “to educate and connect our Nurses with the best home loan solutions for them all over the country.”
It might be worth talking to one of the company’s specialists if your applications are getting rejected. Because that does sometimes happen with lenders that don’t understand nurses’ special working conditions, such as overtime and differential income, or that struggle to grasp the challenges of high student debt and travel nurses’ seemingly chaotic employment records. (More on those and similar challenges below.)
How to overcome home buying challenges as a nurse
Qualifying for a mortgage as a nurse often comes with its own set of hurdles. Lenders are generally focused on income verification, but they may lack a comprehensive understanding of how the nursing profession is structured.
As a result, you might find yourself in the position of having to explain why nurses should be considered a special case in the mortgage application process.
Check your home buying eligibility. Start here
Here are some tips to help you qualify for a nurse home loan.
Nursing income for mortgages
Of course, your basic pay should count toward your qualifying income when applying for a mortgage. But it can become more complicated when it comes to overtime, shift differentials, and “extra” pay.
With those, lenders are likely to look back over the last couple of years to see your average gross pay. If you recently had a schedule change or took on more hours, that might not count toward your income right away.
For example, if you’ve only just started earning the higher hourly rate for night shifts, lenders are unlikely to consider that when deciding how much you can borrow. It might help to get your employer to write the lender, verifying that this will be a long-term arrangement.
You can also write an explanatory letter with your application, telling the lender why you think it should take more of your income into account. Sometimes, this strategy works. But not always.
Travel nurses
Travel nurses sometimes have to seek out lenders that understand their work.
You know that you can hop from contract to contract and agency to agency and never skip a beat, except when you choose to take a vacation. But to a lender, your employment record looks patchy and might suggest you can’t hold down a job.
Again, you can explain to lenders how your employment works. If one won’t listen, move on to those who will.
Student debt
As higher nursing qualifications become more valuable, many nurses take on high levels of student debt. That can affect your home-buying budget because of your debt-to-income ratio (DTI).
Lenders worry that borrowers cannot comfortably afford their mortgage payments and other homeownership costs if they have too many other debts. Unfortunately, student loans can compound that debt burden.
There are ways to drive down your DTI, including paying off big monthly debts with small balances. For example, if your auto loan payments are high but you’ve nearly paid them off, get rid of them before applying for your mortgage.
Nurse.org has an excellent article that goes into more detail about applying for a mortgage as a nurse. And it covers most of what we’ve said and more. You can learn more here.
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How to choose the right home loan for nurses
Finding the ideal mortgage is an important step in the home-buying process, and for nurses, this choice may be affected by a number of factors.
While there’s no one-size-fits-all answer, the best home loan for nurse practitioners will depend on individual circumstances such as credit score, down payment, and even military service.
Check your home buying eligibility. Start here
When should nurses consider a VA loan?
If you have served or are currently serving in the military, either as a nurse or in another capacity, a VA loan is likely your best option.
VA loans come with several benefits, including no down payment and no private mortgage insurance (PMI), making them an attractive choice for those who qualify.
When should a nurse choose a conventional loan?
For nurses who have never served in the military but have a good credit score and a decent down payment, a conventional loan is often the next best option.
These loans typically offer competitive interest rates and may require a lower down payment compared to other loan types.
When should nurses use an FHA loan?
If your credit score falls within the 580–619 range, an FHA loan might be your best bet. The Federal Housing Administration is backing these loans, which are more forgiving of lower credit scores.
However, they do require an upfront mortgage insurance premium and ongoing monthly premiums.
When should a nurse choose a USDA loan?
Lastly, for nurses and eligible healthcare workers with limited savings who are looking to buy in a rural area, a USDA loan could be the perfect fit, provided your household income meets the eligibility criteria.
These loans offer 100% financing, meaning no down payment is required, and they also have lower mortgage insurance costs.
FAQ: Home loans for nurses
Yes, there are special home loan programs for nurses that offer discounts on mortgages. These programs are designed to assist healthcare professionals like registered nurses, nurse practitioners, and even travel nurses in buying a home. The discounts may vary by state and lender, so it’s a good idea to shop around and inquire about home loan assistance for nurses.
While nurses may have stable incomes, the mortgage application process can be complex due to the unique structure of nursing pay, which often includes overtime and shift differentials. Travel nurses may face additional hurdles as their employment can appear inconsistent to lenders. However, there are home loan programs for nurse practitioners that offer relaxed qualification criteria, making the mortgage application process more straightforward.
While various factors, such as credit score and debt-to-income ratio, affect interest rates, nurses may be able to obtain better interest rates through specialized home loan programs. These programs may offer competitive rates as part of the package. It’s advisable to consult with different lenders to find the best loan type in terms of interest rates.
Absolutely, you can get a mortgage as a new nurse. Many lenders offer home loan programs for nurses that don’t require a long employment history in the field. However, you may need to provide proof of employment and your nursing license. If you’re a first-time home buyer, there are also specific loans tailored to your needs, like first-time home buyer loans for nurses.
Yes, there are home loans for nurses with bad credit. While having a lower credit score can be a hurdle in the mortgage application process, certain programs are designed to help nurses overcome this challenge. FHA loans, for example, are more forgiving of lower credit scores and may be a suitable option if your credit falls within the 580–619 range. Additionally, some specialized nurse home loan programs offer more flexible qualification criteria, which can be beneficial for those with less-than-perfect credit. It’s always a good idea to consult with a mortgage advisor to explore all your options.
What are today’s mortgage rates?
Nurses can often find excellent deals when they take advantage of healthcare-oriented mortgage and assistance programs.
But don’t stop at finding the right loan program. You should also shop around for the best mortgage lender.
Each lender you apply to will probably present you with a different set of mortgage rates and closing costs. So get quotes from several and pick the one with the best deal for you.
Time to make a move? Let us find the right mortgage for you
Resources
1Nurse Next Door program
2Homes for Heroes program
Source: themortgagereports.com